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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File Number 1-10272
Archstone-Smith Operating Trust
(Exact name of Registrant as Specified in Its Charter)
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MARYLAND
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74-6056896 |
(State or other jurisdiction of
incorporation or organization) |
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(IRS employer
identification no.) |
9200 E. Panorama Circle, Suite 400
Englewood, Colorado 80112
(Address of principal executive offices and zip code)
(303) 708-5959
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Class A-1 Common Units
(Title of Class)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether Archstone-Smith is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Based on the closing price of Archstone-Smith Trusts
Common Shares on June 30, 2004, which are issuable upon the
redemption of the A-1 Common Units, the aggregate market value
of the Class A-1 Common Units held by non-affiliates of the
registrant was approximately $617,614,803.
At February 14, 2005 there were approximately 21,304,578
Class A-1 and Class B Common Units outstanding held by
non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Table of Contents
2
GLOSSARY
The following abbreviations, acronyms or defined terms used in
this document are defined below:
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Abbreviation, Acronym or Defined Term |
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Definition/Description |
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A-1 Common Unitholders
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Holders of A-1 Common Units. |
A-1 Common Units
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Operating Trust Class A-1 Common Units of beneficial
interest, which are redeemable for cash, or at the option of
Archstone-Smith, A-2 Common Units. A-1 Common Units are the only
common units of the Operating Trust not held by Archstone-Smith
and represent a minority interest of 10.9% in the Operating
Trust at December 31, 2004. |
A-2 Common Units
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Class A-2 common units of beneficial interest.
Archstone-Smith is the sole holder of A-2 Common Units, which
represent approximately an 89.1% interest in the Operating Trust
at December 31, 2004. |
Ameriton
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AMERITON Properties Incorporated, which is a taxable REIT
subsidiary that engages in the opportunistic acquisition,
development and eventual disposition of real estate with a
shorter-term investment horizon. |
Annual Report
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This Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31,
2004. |
Archstone-Smith
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Archstone-Smith Trust, sole holder of the A-2 Common Units and
sole trustee. |
Board
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Collectively, refers to Archstone-Smiths Board of Trustees
or to Archstone-Smith, our sole trustee, unless the context
otherwise requires. |
Class B Common Units
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Operating Trust Common Units of beneficial interest issued in
connection with contributions of property between dividend
distribution dates; they are entitled to receive a pro-rata
distribution with respect to the quarter in which the property
is contributed and, after that distribution date, they
automatically convert into A-1 Common Units. |
Common Share(s)
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Archstone-Smith common shares of beneficial interest, par value
$0.01 per share. |
Common Unit(s)
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For periods prior to the Smith Merger and reorganization into an
UPREIT, Archstones common shares of beneficial interest
are referred to as Common Units. |
Consolidated Engineering Services or CES
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Consolidated Engineering Services, Inc. was a taxable REIT
subsidiary in the business of delivering mission critical
facilities management services for corporate, government and
institutional customers. CES was sold to a third party in
December 2002 for $178 million. |
Convertible Preferred Units
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Collectively, the Series A, H, J, K and L Preferred Units. |
Declaration of Trust
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The Operating Trusts Amended and Restated Declaration of
Trust as filed with the State of Maryland on October 26,
2001, as amended and supplemented. |
3
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Abbreviation, Acronym or Defined Term |
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Definition/Description |
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DEU
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Dividend Equivalent Unit; an amount credited to certain options
and RSUs under Archstone-Smiths long-term incentive
plan. |
Distributions
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Refers to dividends paid by Archstone on either Archstone common
or preferred shares of beneficial interest paid prior to the
UPREIT reorganization and Smith Merger. Subsequent to the Smith
Merger, refers to distributions paid on Operating Trust Common
Units or Preferred Units. |
FASB
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Financial Accounting Standards Board. |
GAAP
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Generally accepted accounting principles in the United States. |
Independent Trustees
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Members of the Board with no employment relationship. |
In Planning
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Parcels of land owned or Under Control, which are in the
development planning process, upon which construction of
apartments is expected to commence within 36 months. |
IRR
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Internal Rate of Return, calculated as the cash rate of return
generated over the investment holding period on invested capital. |
Lease-Up
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The phase during which newly constructed apartment units are
being leased for the first time, but prior to the community
becoming Stabilized. |
LIBOR
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London Interbank Offered Rate. |
Long-Term Unsecured Debt
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Collectively, the Operating Trusts long-term unsecured
senior notes payable and tax-exempt unsecured bonds. |
NAREIT
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National Association of Real Estate Investment Trusts. |
Net Operating Income or NOI
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Represents rental revenues less rental expenses and real estate
taxes. We rely on NOI for purposes of making decisions about
resource allocations and assessing segment performance. We also
believe NOI is a valuable means of comparing period-to-period
property performance. See a reconciliation of NOI to Earnings
from Operations in this Annual Report under the caption
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Apartment Community Operations. |
NYSE
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New York Stock Exchange. |
Operating Trust
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Archstone-Smith Operating Trust. |
Perpetual Preferred Units
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Collectively, the Series B, C, D, I and M Preferred Units.
These units are not convertible, but are redeemable at the
option of Archstone-Smith after certain future dates. |
Preferred Units
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Collectively, the Series A, B, C, D, H, I, J, K, L and
M Preferred Units. |
REIT
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Real estate investment trust. |
Restricted Share Unit or RSU
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A unit representing an interest in one Common Unit, subject to
certain vesting provisions, through our long-term incentive plan. |
4
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Abbreviation, Acronym or Defined Term |
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Definition/Description |
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Same-Store
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Term used to refer to a group of operating communities that had
attained stabilization and were fully operating during the
entire time two periods are being compared. Excludes communities
which were not eligible for inclusion due to (i) recent
acquisition or development, (ii) major redevelopment, or
(iii) a significant number of non- operational units
(fires, floods, etc.). Also excludes the Ameriton properties due
to their short-term holding periods. |
Series A Preferred Units
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Operating Trust Series A Cumulative Preferred Units of
Beneficial Interest, par value $0.01 per unit, which were
redeemed in full in November 2003. |
Series B Preferred Units
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Operating Trust Series B Cumulative Perpetual Preferred
Units of Beneficial Interest, par value $0.01 per unit,
which were redeemed in full in May 2001. |
Series C Preferred Units
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Operating Trust Series C Cumulative Perpetual Preferred
Units of Beneficial Interest, par value $0.01 per unit,
which were redeemed in full in August 2002. |
Series D Preferred Units
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Operating Trust Series D Cumulative Perpetual Preferred
Units of Beneficial Interest, par value $0.01 per unit,
which were redeemed in full in August 2004. |
Series E Perpetual Preferred Units
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8.375% Cumulative Perpetual Preferred Units. 520,000 units
were redeemed in August 2004 and 400,000 Units were redeemed in
November 2004. |
Series F Perpetual Preferred Units
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8.125% Cumulative Perpetual Preferred Units, which were redeemed
in full in September 2004, redeemable in March 2005. |
Series G Perpetual Preferred Units
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8.625% Cumulative Perpetual Preferred Units. |
Series H Preferred Units
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Operating Trust Series H Cumulative Convertible Perpetual
Preferred Units of Beneficial Interest, par value $0.01 per
unit, which were converted into Common Units in full in May 2003. |
Series I Preferred Units
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Operating Trust Series I Cumulative Perpetual Preferred
Units of Beneficial Interest, par value $100,000 per unit,
redeemable in February 2028. |
Series J Preferred Units
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Operating Trust Series J Cumulative Convertible Perpetual
Preferred Units of Beneficial Interest, par value $0.01 per
unit, which were converted into Common Units in full in July
2002. |
Series K Preferred Units
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Operating Trust Series K Cumulative Convertible Perpetual
Preferred Units of Beneficial Interest, par value $0.01 per
unit, which were converted into Common Units in September 2004. |
Series L Preferred Units
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Operating Trust Series L Cumulative Convertible Perpetual
Preferred Units of Beneficial Interest, par value $0.01 per
unit, which were converted into Common Units in December 2004. |
Series M Preferred Unit
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Operating Trust Series M Preferred Unit of Beneficial
Interest, par value $0.01 per unit. |
Service Businesses
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Collectively, Consolidated Engineering Services and Smith
Management Construction. Both of these taxable REIT subsidiaries
were acquired in the Smith Merger and subsequently sold by the
Operating Trust. |
5
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Abbreviation, Acronym or Defined Term |
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Definition/Description |
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Smith Management Construction or SMC
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Smith Management Construction Incorporated was a taxable REIT
subsidiary in the business of providing construction management
and building maintenance services. SMC was sold to members of
its senior management in February 2003. |
Smith Merger
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The series of merger transactions in October 2001 whereby
Archstone-Smith merged with Smith Residential and Archstone
Communities Trust merged with Smith Partnership. |
Smith Partnership
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Charles E. Smith Residential Realty, L.P. |
Smith Residential
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Charles E. Smith Residential Realty, Inc. |
SFAS
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Statement of Financial Accounting Standards. |
Stabilized or Stabilization
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The classification assigned to an apartment community that has
achieved 93% occupancy, and for which development, new
management and new marketing programs (or development and
marketing in the case of a newly developed community) have been
completed. |
Total Expected Investment
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For development communities, represents the total expected
investment at completion; for operating communities, represents
the total expected investment plus planned capital expenditures. |
Trustees
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Members of the Board of Trustees of Archstone-Smith. |
Under Control
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Land parcels we do not own, yet has an exclusive right (through
contingent contract or letter of intent) during a contractually
agreed upon time period to acquire for the future development of
apartment communities, subject to approval of contingencies
during the due diligence process. |
UPREIT
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Umbrella Partnership Real Estate Investment Trust. |
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Forward-Looking Statements
Certain statements in this Annual Report that are not
historical facts are forward-looking statements as
that term is defined under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are based
on our current expectations, beliefs, assumptions, estimates and
projections about the industry and markets in which we operate.
Words such as expects, anticipates,
intends, plans, believes,
seeks, estimates and variations of such
words and similar expressions are intended to identify such
forward-looking statements. Information concerning expected
investment balances, expected funding sources, planned
investments, forecasted dates and revenue and expense growth
assumptions are examples of forward-looking statements. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions, which are
difficult to predict and many of which are beyond our control.
Therefore, actual outcomes and results may differ materially
from what is expressed, forecasted or implied in such
forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required
by applicable law.
Our operating results depend primarily on income from
apartment communities, which is substantially influenced by
supply and demand for apartment units, operating expense levels,
property level operations and the pace and price at which we
develop, acquire or dispose of apartment communities. Capital
and credit market conditions, which affect our cost of capital,
also influence operating results. See Risk Factors
in Item 1 of this Annual Report for a complete discussion
of the various risk factors that could affect our future
performance.
PART I
The Operating Trust (the Company) is a recognized leader in
apartment investment and operations. We own and operate a
portfolio of high-rise and garden-style communities that we
believe cannot be replicated by any other public or private
apartment company. Our significant concentration of high-rise
assets, which represent approximately 35% of our portfolio based
on NOI, also makes us unique in the industry. Our investment
professionals generally live in their local markets, allowing
them to thoroughly research and evaluate potential investments
with a focus on the street corner level of detail. We use this
information to continually upgrade the quality of our portfolio.
As a result, our portfolio is concentrated in many of the most
desirable and expensive neighborhoods in the
Washington, D.C. metropolitan area, Southern California,
the San Francisco Bay area, Chicago, the New York City
metropolitan area, Boston, Southeast Florida and Seattle.
Through our two customer-facing brands, Archstone and Charles E.
Smith, we strive to provide great apartments and great service,
all backed by our unconditional Seal of
Servicetm
guarantees.
As of December 31, 2004, we owned or had an ownership
position in 46 high-rise communities and 189 garden-style
communities, representing a total of 235 communities and
81,188 units, including 5,229 units under
construction. At year-end, our operating portfolio was
concentrated in protected locations in the following core
markets, based on NOI (excluding communities owned by Ameriton):
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Washington, D.C. Metropolitan Area
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39.4 |
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Southern California
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18.9 |
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San Francisco Bay Area, California
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8.2 |
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Chicago, Illinois
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6.1 |
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New York City Metropolitan Area
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4.9 |
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Boston, Massachusetts
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4.7 |
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Southeast Florida
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4.7 |
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Seattle, Washington
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3.1 |
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Other
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10.0 |
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Total:
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100.0 |
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7
The Company
We are engaged primarily in the operation, development,
redevelopment, acquisition and long-term ownership of apartment
communities in the United States. We are structured as an
UPREIT, under which all property ownership and business
operations are conducted through the Operating Trust.
Archstone-Smith is our sole trustee and owned 89.1% of the
Operating Trust at December 31, 2004. Archstone-Smith
Common Shares trade on the New York Stock Exchange (NYSE: ASN).
We strive to create value for our unitholders by:
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Maximizing the performance of our apartment communities by
(i) generating long-term sustainable growth in operating
cash flow, (ii) recruiting, training and retaining people
who we believe are the best in the apartment business,
(iii) strengthening our operating platform,
(iv) leveraging the equity of our brands,
(v) investing in technology that improves our core business
and (vi) solidifying our reputation for innovative,
operational leadership; |
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Acquiring, developing and operating apartments in markets
characterized by: (i) protected locations with limited land
on which to build new housing; (ii) expensive single-family
home prices; and (iii) a strong, diversified economic base
with good employment growth potential; and |
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The selective sale of apartment communities, which allows us to
continually upgrade our portfolio by using proceeds to fund
investments with higher anticipated growth prospects in
outstanding locations in our eight core markets. |
2004 Accomplishments
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Attractive Shareholder Returns and Dividends |
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We produced a total unitholder return (TSR) of 48.8% in 2004.
The Companys 2004 TSR exceeded the S&P 500 Index
and the National Real Estate Investment Trusts (NAREIT)
Apartment Index by 3,791 and 1,407 basis points,
respectively. |
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We paid a one-time special distribution of $1.00 per common
unit to all common unitholders of record on December 23,
2004. The $1.00 per unit was in addition to the
Companys annual common unit distribution of $1.72 per
share in 2004. The special distribution resulted primarily from
the fourth quarter sale of approximately $596 million of
non-core assets to condominium converters at an average
capitalization rate below 4%, which created substantial value
for our unitholders. |
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We also increased our 2005 annualized common unit distribution
level to $1.73, or $0.4325 per quarter, up from $1.72. This
marks our 15th consecutive annual common unit distribution
increase and a total increase of 170% since 1991. Our first
quarter 2005 common unit distribution paid in February
represented our 118th consecutive quarterly payment. |
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On December 17, 2004, Archstone-Smith was added to the
Standard & Poors 500 Index (S&P 500), which has
been a long-term corporate goal. |
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We were recognized as one of Americas Most Admired
Companies by Fortune magazine in 2004, ranking as the
number-one apartment company on the list. |
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Forbes magazine ranked Archstone-Smith at 956 on the
Forbes 2000 List, the magazines comprehensive
ranking of the worlds largest corporations. |
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Operations and Investment Highlights |
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The Operating Trusts Same-Store reported NOI in 2004 is
approximately the same as it was in 2001, in spite of our peer
group average being down approximately 9% for that same time
period. |
8
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We accelerated the implementation of MRI, a web-based,
customer-centric property management system that automates
virtually all of our daily on-site leasing and reporting tasks.
Developed with our input by Intuit Real Estate Solutions
(NASDAQ: INTU), MRI allows our site teams to better track
customer service requests, manage customer records and execute
leases more efficiently which we believe enhances
our customers experience with us. MRI is operational in
201 communities as of February 14, 2005, with full
portfolio implementation anticipated by mid-2005. |
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We introduced resident-only web sites, which allow customers
24/7 access to us to complete new leases, pay rent online,
submit and track service requests, view and update account
information and more. |
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In 2004, we acquired $866.2 million of assets, excluding
Ameriton, representing 3,753 units, and completed the
development of $182.6 million of assets, representing
678 units in our core markets. Approximately 90% of our
portfolio is now concentrated in our core markets. |
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We completed the disposition of $1.4 billion of non-core
assets, excluding Ameriton, representing 9,430 units,
generating GAAP gains of $372.2 million and an average
unleveraged internal rate of return (IRR) of 13.8%. |
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Ameriton, our wholly owned subsidiary that utilizes our
development, acquisition and operating expertise to capitalize
on short-term real estate investment opportunities, completed
the sale of $360 million of assets in 2004, generating GAAP
pre-tax gains of $65.1 million and an average unleveraged
pre-tax IRR of 36.6%. |
Customer-focused Operations
We believe that our long-term cash flow growth is enhanced by
the Archstone and Charles E. Smith brands, our efficient
operating platform, robust and scalable technology, and
continued investment in our associates.
Powerful brands. An essential component of our strategy
is to consistently offer a higher level of service at our
apartment communities. Through our Seal of
Service,tm
we offer our residents convenience and flexibility all backed by
written guarantees. The Seal of
Servicetm
helps to create customer loyalty and trust, and increase the
likelihood of renewals and referrals.
Core Process Standardization. We believe that we can
create a distinct competitive advantage by identifying and
implementing the best practices for our most critical processes
and standardizing them at each of our communities. To do this,
we assembled a Core Process Project (CPP) team to focus on
three important customer touch-points: (i) customer
inquiries and leasing, (ii) the move-in experience, and
(iii) renewal, transfer or move-out. To capture best
practices, the CPP team conducts extensive field research with
front-line associates to translate proven tactics into scalable
tools that ensure consistency in our day-to-day customer
interactions.
In 2004, the CPP team rolled out Leasing Call Excellence, a
call-coaching program that dramatically improves our phone
interactions with customers. The CPP team began the roll-out of
the Move-in Tracker, a system that standardizes the various
tasks needed to prepare for new residents and ensure
consistent, defect-free move-ins across our portfolio. We
believe that by enhancing our customers experiences with
us at these critical touch points, we will ultimately increase
customer acquisition, retention and referrals.
Investing in technology. We invest in technology to
improve our core operations and make it easier for our customers
to do business with us. In 2004, we accelerated the roll-out of
MRI, our web-based property management system. As of
February 14, 2005, MRI was operational in
201 communities, with a full roll-out expected by mid-2005.
MRI provides a seamless online interface with our customers via
resident-only web sites, allowing customers 24/7 access to us to
complete new leases, pay rent online, submit service requests
and more. Online rent payment went live in January 2004; by the
end of the year, we had collected a total of $11.3 million
in online rent payments including approximately $4 million
in December 2004 indicating accelerating usage of
9
the product. Since May 2004, when online lease was rolled out,
we have executed nearly 200 online leases. These resident
web sites and the online leasing and rent payment
functionality are expected to be fully rolled out
across our portfolio by July 2005.
In addition, MRIs automated work order solution improves
our ability to manage and execute service requests, one of our
most important customer relations functions. Equally important,
the system gives us the ability to accurately track resident
histories to better understand and serve our customers.
Investing in our associates. A critical component to
ensuring the integrity of our brand offering is attracting,
training and retaining the best professionals in our
industry and giving them the support and tools to
provide an exceptional customer experience.
Through our Training Community program, new community associates
spend two to four days at a designated training
community one that exemplifies excellence in
operations and customer service in their market. New
associates are teamed with a Training Ambassador, a
community-based associate in a comparable position, to learn our
processes first-hand before they begin interacting with
customers on their own. Over the past year, we have added
full-time Training Ambassadors in our core markets. These
full-time Ambassadors are dedicated to training new associates
and providing critical one-on-one follow-up after 30 days
of employment for additional training support. We believe that
this hands-on training better prepares new associates to deliver
on our brand promises and create a consistent and
positive customer experience.
In addition to the Training Community and Training Ambassador
programs, each of our community management and leasing
associates receives extensive training in their first year
through our Customer-centered Sales Excellence
(CCSE) training program. CCSEs seven training modules
cover the various aspects of our sales process and are offered
to associates in manageable half-day classes. We are also
dedicated to ongoing training for each of our associates.
In 2004, we expanded The Practice of Leadership, our
feedback-based training program, from operations and regional
service managers to include corporate managers and
non-operations functions, giving them the tools to become better
leaders. This three-day program focuses on six leadership
practices consistent with our company culture and values that we
believe drive our success. This program is complemented by a
feedback component, through which direct reports and peers
evaluate corporate managers to identify strengths and
opportunities for improvement. Community and Service Managers
attend a comparable 3-day program, Leading Teams at
Archstone-Smith, where they learn and practice
applying ideas, techniques and tools to enhance
their effectiveness as team leaders. Approximately 375
community, service and corporate managers attended the Program
in 2004.
Investment Strategy
Protected markets. We invest our capital in protected
markets, where there is a very limited amount of land on which
new housing can be developed, which minimizes new competition.
In addition to supply constraints, our core markets are
characterized by very expensive single-family home prices and a
strong, diversified economic base with employment growth
potential, which we believe maximizes our ability to maintain
occupancy and produce sustainable long-term cash flow growth.
Capital recycling program. We utilize a successful
capital allocation strategy, using the selective sale of
non-core assets to redeploy disposition proceeds into
investments with higher anticipated long-term growth prospects.
We believe that concentrating our portfolio in protected markets
improves our growth rate, value creation and long-term business
fundamentals.
Our locally based investment professionals generally live in
their local markets, allowing them to thoroughly research and
evaluate potential investments at the street corner level of
detail. This locally based investment acumen guides our
decisions in making investments, allowing us to continually
upgrade the quality of our portfolio. As a result, our portfolio
is concentrated in many of the most desirable neighborhoods in
the Washington, D.C. metropolitan area, Southern
California, the San Francisco Bay area, Chicago, the New
York City metropolitan area, Boston, Southeast Florida and
Seattle.
10
We believe that one of our most important responsibilities is to
consistently make intelligent capital allocation decisions that
maximize shareholder value. For example, we took advantage of an
extraordinary opportunity to sell $596 million of non-core
assets to condominium converters at very attractive sales prices
in the fourth quarter of 2004. We believe the sale of these
non-strategic assets at very low cap rates demonstrates the
tremendous value embedded in our remaining portfolio.
Development and redevelopment. We believe we create
significant value through the development of new apartment
communities and the redevelopment of existing operating
communities. At December 31, 2004, we had 3,587 units,
representing a Total Expected Investment of $952.5 million,
of development communities under construction (excluding
Ameriton) in markets that include Southern California, downtown
Boston, the Washington, D.C. metropolitan area and the New
York City metropolitan area.
In 2004, we completed $182.6 million of new development
communities (excluding Ameriton), representing 678 units in
markets that include Playa del Rey, Pasadena, and Los Angeles,
Calif. During the year, four development properties achieved
Stabilization, representing a Total Expected Investment of
$191.7 million and adding a total of 786 units to our
same-store operating portfolio.
Ameriton Properties Incorporated. Ameriton is a wholly
owned subsidiary of the Operating Trust that utilizes the
Companys development, acquisition and operating expertise
to capitalize on short-term real estate investment
opportunities. In 2004, Ameriton completed the sale of
$360 million of assets it had previously developed or
acquired, representing 2,618 units. Since 2000, Ameriton
has completed $961 million in dispositions, generating
pre-tax GAAP gains of $113 million; the weighted average
unleveraged pre-tax IRR on these dispositions was approximately
24.7%. As of December 31, 2004, Ameriton had
$400 million, representing 3,009 units, of communities
in development and owned or had an ownership position in
$372 million of operating communities, representing
4,131 units, that will be opportunistically sold over time.
Conservative Balance Sheet Management
One of our primary financial objectives is to structure our
balance sheet to enhance our financial flexibility in order to
have access to capital when others in the industry do not.
Archstone-Smith has a significant equity base, with equity
market capitalization of $8.6 billion, including the value
of the A-1 Common Units, as of December 31, 2004. Our
investment-grade debt ratings from Standard &
Poors (BBB+), Moodys Investors Service (Baa1) and
Fitch, Inc. (BBB+) are indicative of our solid financial
position.
In 2004, we increased our unencumbered asset base to
$6.1 billion as of the end of the year. As of
February 14, 2005, we had approximately $827 million
of liquidity, including cash on hand, restricted cash in escrows
and capacity on unsecured credit facilities. We believe this
financial flexibility allows us to act more quickly on new
investment opportunities as they arise.
Archstone-Smith repurchased $98.4 million of its common
stock in 2004, at prices ranging from $26.79 to $35.50 per
share at an average price of $27.93 per share. In the
fourth quarter, we paid a $221 million one-time special
distribution of $1.00 per share while maintaining our
relatively low ratio of total
debt-to-undepreciated-book-capitalization of 43.7% at year-end.
We also called all of our outstanding Series D Preferred
Units and Series F Perpetual Preferred Units as well as a
portion of our Series E Perpetual Preferred Units for
redemption. Additionally, the Series K and Series L
Preferred Units were converted into Common Units during 2004.
The redemption and conversion of these Preferred Units
strengthens our balance sheet and will have a positive impact on
our fixed charge coverage ratio going forward.
During the fourth quarter of 2004, we opportunistically took
advantage of the increased liquidity in the banking market to
extend the maturity date of our $600 million unsecured line
of credit to December 2007 from October 2006. The syndication of
our facility was heavily over-subscribed, as we received over
$850 million of commitments from 23 domestic and
international financial institutions. We also renegotiated
several key terms, such as reducing our pricing by 10 basis
points to a LIBOR spread of 50 bps, and lowered the cap
rate used to value our operating portfolio. With these
modifications, we now enjoy the lowest facility
11
pricing and portfolio cap rate of any REIT to our knowledge,
which will directly benefit the Company over the next three
years.
Our long-term debt is structured to create a relatively level
principal maturity schedule, without significant repayment
obligations in any year. We have only $313.7 million of
long-term debt maturing in 2005, representing 2.5% of our total
market capitalization. The following summarizes our long-term
debt maturity profile for 2005 through 2009, and thereafter, as
of December 31, 2004 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Market | |
Year |
|
Total | |
|
Capitalization(1) | |
|
|
| |
|
| |
2005
|
|
$ |
313.7 |
|
|
|
2.5 |
% |
2006
|
|
|
295.5 |
|
|
|
2.3 |
% |
2007
|
|
|
542.5 |
|
|
|
4.3 |
% |
2008
|
|
|
456.6 |
|
|
|
3.6 |
% |
2009
|
|
|
454.6 |
|
|
|
3.6 |
% |
Thereafter
|
|
|
2,067.7 |
|
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,130.6 |
|
|
|
32.4 |
% |
|
|
|
|
|
|
|
|
|
(1) |
Total market capitalization as of December 31, 2004,
represents the market capitalization based on the closing share
price on the last trading day of the period for publicly traded
securities and the liquidation value for private securities as
well as the book value of total debt for Archstone-Smith. |
Consistent dividend growth. We paid distributions
totaling $2.72 per common unit in 2004, including our
annualized quarterly distribution of $1.72 per unit and a
one-time special distribution of $1.00 per share. The
special distribution resulted from the sale of approximately
$596 million of non-core assets to condominium converters
at an average combined capitalization rate below 4% in the
fourth quarter of 2004. In addition, we announced our
anticipated 2005 distribution level of $1.73 per unit, a
170% increase since 1991, the year we began to focus exclusively
on apartment communities. With the 2005 increase, we have raised
our annual distribution for 15 consecutive years. We have paid
118 consecutive quarterly distributions.
Management
We have several senior executives who possess the leadership,
operational, investment and financial skills and experience to
oversee the overall operation of our Company. Several of our
senior officers could serve as the principal executive officer
and continue our strong performance. Our management team
emphasizes active training and organizational development
initiatives for associates at all levels of our Company in order
to build long-term management depth and facilitate succession
planning.
12
Officers of the Operating Trust
|
|
|
Senior Officers of the Operating Trust |
The senior officers of the Operating Trust are:
|
|
|
Name |
|
Title |
|
|
|
R. Scot Sellers
|
|
Chairman and Chief Executive Officer |
J. Lindsay Freeman
|
|
Chief Operating Officer |
Charles E. Mueller, Jr.
|
|
Chief Financial Officer |
Alfred G. Neely
|
|
Chief Development Officer and President of the High-Rise Division |
Dana K. Hamilton
|
|
Executive Vice President National Operations |
Caroline Brower
|
|
General Counsel and Secretary |
Daniel E. Amedro
|
|
Senior Vice President and Chief Information Officer |
Mark A. Schumacher
|
|
Senior Vice President and Chief Accounting Officer |
|
|
|
Biographies of Senior Officers |
R. Scot Sellers 48 Trustee,
Chairman and Chief Executive Officer of the Operating Trust
since June 1997, with overall responsibility for the Operating
Trusts strategic direction, investments and operations;
Co-Chairman and Chief Investment Officer of the Operating Trust
from July 1998 to December 1998. From September 1994 to June
1997, Managing Director of the Operating Trust, where he had
overall responsibility for the Operating Trusts investment
strategy and implementation; Senior Vice President of the
Operating Trust from May 1994 to September 1994.
Mr. Sellers is a member of the Executive Committee and
First Vice Chairman of the Board Governors of NAREIT; a member
of the Executive Committee of the Board of Directors of the
National Multi Housing Council; Director of Christian
International Scholarship Foundation; Director of Alliance for
Choice in Education.
J. Lindsay Freeman 59 Chief
Operating Officer since September 2002, with responsibility for
managing all investment and operating activities for the
Operating Trust; President-East Division of the Operating Trust
from October 2001 to September 2002, with responsibility for all
investments and operations of the East Division; from July 1998
to October 2001, Managing Director of the Operating Trust, with
responsibility for investments and operations in the East and
Central Regions; Managing Director of Security Capital Atlantic
Incorporated from December 1997 to July 1998; Senior Vice
President of Security Capital Atlantic Incorporated from May
1994 to November 1997; previously, Senior Vice President and
Operating Partner of Lincoln Property Company in Atlanta,
Georgia, where he was responsible for acquisitions, financing,
construction and management of apartment communities within the
Atlantic region and oversaw operations of 16,000 apartment units.
Charles E. Mueller, Jr. 41
Chief Financial Officer of the Operating Trust since December
1998, with responsibility for the planning and execution of the
Companys financial strategy and balance sheet management;
Mr. Mueller oversees the Companys
accounting/financial reporting, corporate finance, investor
relations, corporate and property tax, due diligence and risk
management functions. Vice President of the Operating Trust from
September 1996 to December 1998; prior thereto, he held various
financial positions with Security Capital, where he provided
financial services to Security Capital and its affiliates.
Alfred G. Neely 59 Named
President of High-Rise Division in February 2005. Chief
Development Officer of the Operating Trust since April 2003,
with responsibility for the oversight and direction of all the
Operating Trust residential development projects; Executive Vice
President of the Operating Trust or Charles E. Smith Residential
Realty, Inc. from April 1989 to April 2003 with responsibility
for oversight and direction of High-Rise residential development
projects; Executive Vice President and Managing General Partner
of the New Height Group from August 1981 to April 1989 with
responsibility for the development and
13
management of 2.5 million square feet of mixed-use
property; General Manager of a 1,100-acre mixed-use business
park from October 1973 to April 1981 where he managed the
development of 3.5 million square feet of corporate user
buildings.
Dana K. Hamilton 36 Executive
Vice President-National Operations for the Operating Trust since
May 2001, with responsibility for corporate services, including
human resources, training and development, marketing and
corporate communications, and new business development; Senior
Vice President of the Operating Trust from December 1998 to May
2001; Vice President from December 1996 to December 1998, with
responsibility for new product development and revenue
enhancement through portfolio-wide initiatives.
Caroline Brower 56 General
Counsel and Secretary of the Operating Trust since September,
1999, with responsibility for legal and corporate governance;
from September 1998 to September 1999, President of Ameriton
Properties Incorporated; prior thereto, Ms. Brower was a
partner of Mayer, Brown & Platt (now Mayer, Brown,
Rowe & Maw, LLP) where she practiced transaction and
real estate law.
Daniel E. Amedro 48 Chief
Information Officer and Senior Vice President of the Operating
Trust since January 1999, with primary responsibility for the
Companys information technology functions and initiatives;
Chief Information Officer and Vice President from May 1998 to
January 1999; from September 1996 to March 1998, Vice President
of Information Services for American Medical Response, the
largest private ambulance operation in the United States; prior
thereto, Vice President of Information Services for Hyatt Hotels
and Resorts, where he was responsible for all strategic
information systems including Spirit, Hyatts
worldwide reservation system, which supported over 50,000 users
and was recognized as the leading reservations system in the
hospitality industry.
Mark A. Schumacher 46 Senior Vice
President and Chief Accounting Officer of the Operating Trust
since January 2002, with principal responsibility for accounting
and financial reporting; prior thereto, Vice President and
Corporate Controller of Qwest Communications International from
December 2000 to December 2001 where he had principal
responsibility for accounting and financial reporting; from
April 1991 to December 2000, held various senior and executive
level positions in the accounting and financial reporting
departments of US West; from April 1984 to April 1991 he held
various managerial level positions in the accounting and
financial reporting department of US West.
Employees
We currently employ approximately 2,640 individuals, of whom
approximately 2,080 are focused on the site-level operation of
our garden communities and high-rise properties. Of the
site-level associates, approximately 125 are subject to
collective bargaining agreements with four unions in Illinois
and New York. The balance are professionals who manage corporate
and regional operations, including our investment program,
property operations, financial activities and other support
functions. We consider our relationship with our employees to be
very good.
Insurance
We carry comprehensive general liability coverage on our owned
communities, with limits of liability customary within the
industry to insure against liability claims and related defense
costs. Similarly, we are insured against the risk of direct
physical damage in amounts necessary to reimburse the Company on
a replacement cost basis for costs incurred to repair or rebuild
each property, including loss of rental income during the
reconstruction period. Our property policies for all operating
and development communities include coverage for the perils of
flood and earthquake shock with limits and deductibles customary
in the industry. We also obtain title insurance policies when
acquiring new properties, which insure fee title to our real
properties. We currently have coverage for losses incurred in
connection with both domestic and foreign terrorist-related
activities. The terms of our property and general liability
policies may exclude certain mold-related claims or other types
of claims based on the specific circumstances and allegations.
Should an uninsured loss arise against the Company, we would be
required to use our own funds to resolve the issue, including
litigation costs.
14
Competition
There are numerous commercial developers, real estate companies
and other owners of real estate that we compete with in seeking
land for development, apartment communities for acquisition and
disposition and residents for apartment communities. All of our
apartment communities are located in developed areas that
include other apartment communities. The number of competitive
apartment communities in a particular area could have a material
adverse effect on our ability to lease units and on the rents
charged. In addition, single-family homes and other residential
properties provide housing alternatives to residents and
potential residents of our apartment communities.
Available Information and Code of Ethics
Our web site is http://www.archstonesmith.com. We make
available free of charge, on or through our web site, our
annual, quarterly and current reports, as well as any amendments
to these reports, as soon as reasonably practicable after
electronically filing these reports with the Securities and
Exchange Commission. The reference to our web site does not
incorporate by reference the information contained in the web
site and such information should not be considered a part of
this report. We have adopted a code of ethics and business
conduct applicable to our Board and officers and employees,
including our principal executive officer, principal financial
officer and principal accounting officer or controller. A copy
of our code of ethics and business conduct is included as an
exhibit to this report and is available through our web site. In
addition, copies of the code of ethics and business conduct can
be obtained, free of charge, upon written request to Investor
Relations, 9200 East Panorama Circle, Suite 400, Englewood,
Colorado 80112. Any amendments to or waivers of our code of
ethics and business conduct that apply to the principal
executive officer, principal financial officer and principal
accounting officer or controller and that relate to any matter
enumerated in Item 406(b) of Regulation S-K, will be
disclosed on our web site.
Risk Factors
The following factors could affect our future financial
performance:
We have restrictions on the
sale of certain properties.
A sale of any of the properties acquired in the Smith Merger
prior to January 1, 2022, could result in increased costs
to us in light of the tax-related obligations made to the former
Smith Partnership Unitholders. Under the shareholders
agreement between Archstone-Smith, the Operating Trust, Robert
H. Smith and Robert P. Kogod, we are restricted from
transferring specified high-rise properties located in the
Crystal City area of Arlington, Virginia until October 31,
2016, without the consent of Messrs. Smith and Kogod, which
could result in our inability to sell these properties at an
opportune time and at increased costs to us. However, we are
permitted to transfer these properties in connection with a sale
of all of the properties in a single transaction or pursuant to
a bona fide mortgage of any or all of such properties in order
to secure a loan or other financing.
We depend on our key
personnel.
Our success depends on our ability to attract and retain the
services of executive officers, senior officers and company
managers. There is substantial competition for qualified
personnel in the real estate industry and the loss of several of
our key personnel could have an adverse effect on us.
Debt financing could
adversely affect our performance.
We are subject to risks associated with debt financing and
preferred equity. These risks include the risks that we will not
have sufficient cash flow from operations to meet required
payments of principal and interest or to pay distributions on
our securities at expected rates, that we will be unable to
refinance current or future indebtedness, that the terms of any
refinancing will not be as favorable as the terms of existing
indebtedness, and that we will be unable to make necessary
investments in new business initiatives due to lack of available
funds. Increases in interest rates could increase interest
expense, which would adversely affect net earnings
15
and cash available for payment of obligations. If we are unable
to make required payments on indebtedness that is secured by a
mortgage on our property, the asset may be transferred to the
lender with a consequent loss of income and value to us.
Additionally, our debt agreements contain customary covenants
which, among other things, restrict our ability to incur
additional indebtedness and, in certain instances, restrict our
ability to engage in material asset sales, mergers,
consolidations and acquisitions. These debt agreements also
require us to maintain various financial ratios. Failure to
comply with these covenants could result in a requirement to
repay the indebtedness prior to its maturity, which could have
an adverse effect on our operations and ability to make
distributions to unitholders.
Some of our debt instruments bear interest at variable rates.
Increases in interest rates would increase our interest expense
under these instruments and would increase the cost of
refinancing these instruments and issuing new debt. As a result,
higher interest rates would adversely affect cash flow and our
ability to service our indebtedness.
We had $4.1 billion in total debt outstanding as of
December 31, 2004, of which $2.0 billion was secured
by real estate assets and $590.5 million was subject to
variable interest rates, including $19.0 million
outstanding on our short-term credit facilities.
Archstone-Smith may not have
access to equity capital.
A prolonged period in which we cannot effectively access the
public equity markets may result in heavier reliance on
alternative financing sources to undertake new investment
activities. These alternative sources of financing may be more
costly than raising funds in the public equity markets.
We could be subject to acts
of terrorism.
Periodically, we receive alerts from government agencies that
apartment communities could be the target of both domestic and
foreign terrorism. Although we currently have insurance coverage
for losses incurred in connection with terrorist-related
activities, losses could exceed our coverage limits and have a
material adverse affect on our operating results.
We are subject to risks
inherent in ownership of real estate.
Real estate cash flows and values are affected by a number of
factors, including changes in the general economic climate,
local, regional or national conditions (such as an oversupply of
communities or a reduction in rental demand in a specific area),
the quality and philosophy of management, competition from other
available properties and the ability to provide adequate
property maintenance and insurance and to control operating
costs. Real estate cash flows and values are also affected by
such factors as government regulations, including zoning, usage
and tax laws, interest rate levels, the availability of
financing, property tax rates, utility expenses, potential
liability under environmental and other laws and changes in
environmental and other laws. Although we seek to minimize these
risks through our market research and property management
capabilities, they cannot be totally eliminated.
We are subject to risks
inherent in real estate development.
We have developed or commenced development on a substantial
number of apartment communities and expect to develop additional
apartment communities in the future. Real estate development
involves risks in addition to those involved in the ownership
and operation of established communities, including the risks
that financing, if needed, may not be available on favorable
terms, construction may not be completed on schedule,
contractors may default, estimates of the costs of developing
apartment communities may prove to be inaccurate and communities
may not be leased or rented on profitable terms or in the time
frame anticipated. Timely construction may be affected by local
weather conditions, local moratoria on construction, local or
national strikes and local or national shortages in materials,
building supplies or energy and fuel for equipment. These risks
may cause the development project to fail to perform as expected.
16
Real estate investments are
relatively illiquid and we may not be able to sell properties
when appropriate.
Equity real estate investments are relatively illiquid, which
may tend to limit our ability to react promptly to changes in
economic or other market conditions. Our ability to dispose of
assets in the future will depend on prevailing economic and
market conditions.
Compliance with
environmental regulations may be costly.
We must comply with certain environmental and health and safety
laws and regulations related to the ownership, operation,
development and acquisition of apartments. Under those laws and
regulations, we may be liable for, among other things, the costs
of removal or remediation of certain hazardous substances,
including asbestos-related liability. Those laws and regulations
often impose liability without regard to fault. As part of our
due diligence procedures, we have conducted Phase I
environmental assessments on each of our communities prior to
acquisition; however, we cannot give any assurance that those
assessments have revealed all potential liabilities.
Costs associated with
moisture infiltration and resulting mold remediation may be
costly.
As a general matter, concern about indoor exposure to mold has
been increasing as such exposure has been alleged to have a
variety of adverse effects on health. As a result, there has
been a number of lawsuits in our industry against owners and
managers of apartment communities relating to moisture
infiltration and resulting mold. We have implemented guidelines
and procedures to address moisture infiltration and resulting
mold issues if and when they arise. We believe that these
measures will minimize the potential for any adverse effect on
our residents. The terms of our property and general liability
policies after June 30, 2002, may exclude certain
mold-related claims. Should an uninsured loss arise against the
Company, we would be required to use our own funds to resolve
the issue, including litigation costs. We can make no assurance
that liabilities resulting from moisture infiltration and the
presence of or exposure to mold will not have a future material
impact on our financial results.
Changes in laws may result
in increased cost.
We may not be able to pass on increased costs resulting from
increases in real estate taxes, income taxes or other
governmental requirements, such as the enactment of regulations
relating to internal air quality, directly to our residents.
Substantial increases in rents, as a result of those increased
costs, may affect the ability of a resident to pay rent, causing
increased vacancy.
Archstone-Smiths
failure to qualify as a REIT would have adverse
consequences.
We believe that Archstone-Smith has qualified for taxation as a
REIT under the Internal Revenue Code and they plan to continue
to meet the requirements for taxation as a REIT. They cannot,
however, guarantee that they will continue to qualify in the
future as a REIT. They cannot give any assurance that new
legislation, regulations, administrative interpretations or
court decisions will not significantly change the requirements
relating to Archstone-Smiths qualification. If they fail
to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the Internal Revenue
Service granted them relief, they would remain disqualified as a
REIT for four years following the year in which they failed to
qualify. In the event that they failed to qualify as a REIT,
they would be required to pay significant income taxes and would
have less money available for operations and distributions to
unitholders. This would likely have a significant adverse effect
on the value of our securities and our ability to raise
additional capital. In order to maintain our qualification as a
REIT under the Internal Revenue Code, Archstone-Smiths
declaration of trust limits the ownership of our Units by any
person or group of related persons to 9.8%, unless special
approval is granted by our Board.
We intend to qualify as a
partnership, but we cannot guarantee we will qualify.
We intend to qualify as a partnership for federal income tax
purposes. However, we will be treated as an association taxable
as a corporation for federal income tax purposes if we are
deemed to be a publicly traded
17
partnership, unless at least 90% of its income is qualifying
income as defined in the tax code. Qualifying income for our 90%
test generally includes passive income, such as real property
rents, dividends and interest. The income requirements
applicable to REITs and the definition of qualifying income for
purposes of this 90% test are similar in most respects. We
believe that we will meet this qualifying income test, but
cannot guarantee that we will. If we were to be taxed as a
corporation, it will incur substantial tax liabilities,
Archstone-Smith would fail to qualify as a REIT for tax purposes
and our ability to raise additional capital would be impaired.
We are subject to losses
that may not be covered by insurance.
There are certain types of losses (such as from war) that may be
uninsurable or not economically insurable. Additionally, many of
our communities in California are located in the general
vicinity of active earthquake fault lines and many of our
Southeast Florida assets are in coastal locations and subject to
hurricanes. Although we maintain insurance to cover most
reasonably likely risks, including earthquakes and hurricanes,
if an uninsured loss or a loss in excess of insured limits
occurs, we could lose both our invested capital in, and
anticipated profits from, one or more communities. We may also
be required to continue to repay mortgage indebtedness or other
obligations related to such communities. The terms of our
property and general liability policies after June 30,
2002, may exclude certain mold-related claims. We can make no
assurance that liabilities resulting from moisture infiltration
and the presence of or exposure to mold will not have a future
material impact on our financial results. Should an uninsured
loss arise against the Company, we would be required to use our
own funds to resolve the issue, including litigation costs. Any
such loss could materially adversely affect our business,
financial condition and results of operations.
We have a concentration of
investments in certain markets.
At December 31, 2004, approximately 39.4% of our apartment
communities are located in the Washington, D.C.
metropolitan area, based on NOI. Approximately 18.9% of our
apartment communities are located in Southern California at
December 31, 2004, based on NOI. Southern California is the
geographic area comprised of the Los Angeles, the Inland Empire,
Orange County, San Diego and Ventura County markets.
Additionally, approximately 8.2% of our apartment communities
are located in the San Francisco Bay area of California at
December 31, 2004, based on NOI. We are, therefore, subject
to increased exposure (positive or negative) to economic and
other competitive factors specific to protected markets within
these geographic areas.
|
|
|
Our business is subject to extensive competition. |
There are numerous commercial developers, real estate companies
and other owners of real estate that we compete with in seeking
land for development, apartment communities for acquisition and
disposition and residents for apartment communities. All of our
apartment communities are located in developed areas that
include other apartment communities. The number of competitive
apartment communities in a particular area could have a material
adverse effect on our ability to lease units and on the rents
charged. In addition, single-family homes and other residential
properties provide housing alternatives to residents and
potential residents of our apartment communities.
18
Geographic Distribution
At December 31, 2004, the geographic distribution for our
eight core markets based on NOI, excluding properties owned by
Ameriton, was as follows:
|
|
|
|
|
|
Washington, D.C. Metropolitan Area
|
|
|
39.4 |
% |
Southern California
|
|
|
18.9 |
|
San Francisco Bay Area, California
|
|
|
8.2 |
|
Chicago, Illinois
|
|
|
6.1 |
|
New York City Metropolitan Area
|
|
|
4.9 |
|
Boston, Massachusetts
|
|
|
4.7 |
|
Southeast Florida
|
|
|
4.7 |
|
Seattle, Washington
|
|
|
3.1 |
|
|
|
|
|
|
Total
|
|
|
90.0 |
% |
|
|
|
|
The following table summarizes the geographic distribution at
December 31, 2004, 2003 and 2002 based on NOI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio(1)(2) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Core Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington, D.C. Metropolitan Area
|
|
|
39.4 |
% |
|
|
40.0 |
% |
|
|
35.1 |
% |
|
Southern California
|
|
|
18.9 |
|
|
|
15.2 |
|
|
|
13.2 |
|
|
San Francisco Bay Area, California
|
|
|
8.2 |
|
|
|
9.8 |
|
|
|
9.0 |
|
|
Chicago, Illinois
|
|
|
6.1 |
|
|
|
7.6 |
|
|
|
8.5 |
|
|
New York City Metropolitan Area
|
|
|
4.9 |
|
|
|
2.5 |
|
|
|
2.2 |
|
|
Boston, Massachusetts
|
|
|
4.7 |
|
|
|
5.0 |
|
|
|
5.2 |
|
|
Southeast Florida
|
|
|
4.7 |
|
|
|
4.2 |
|
|
|
6.6 |
|
|
Seattle, Washington
|
|
|
3.1 |
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Markets
|
|
|
90.0 |
% |
|
|
87.6 |
% |
|
|
83.2 |
% |
|
|
|
|
|
|
|
|
|
|
Non-Core Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, Georgia
|
|
|
2.3 |
% |
|
|
2.5 |
% |
|
|
3.1 |
% |
|
Denver, Colorado
|
|
|
1.9 |
|
|
|
2.2 |
|
|
|
2.4 |
|
|
Houston, Texas
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
1.0 |
|
|
Raleigh, North Carolina
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.4 |
|
|
Other
|
|
|
3.2 |
|
|
|
5.2 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Core Markets
|
|
|
10.0 |
% |
|
|
12.4 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total All Markets
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on NOI for the fourth quarter of each calendar year,
excluding NOI from communities disposed of during the period.
See Item 7 under the caption Apartment Community
Operations for a discussion on why we believe NOI is a
meaningful measure and a reconciliation of NOI to Earnings from
Operations. |
|
(2) |
Excludes all Ameriton properties. |
19
Real Estate Portfolio
We are a leading multifamily REIT focused on the operation,
development, redevelopment, acquisition, management and
long-term ownership of apartment communities in protected
markets throughout the United States. The following information
summarizes our wholly owned real estate portfolio as of
December 31, 2004 (dollar amounts in thousands). Additional
information on our real estate portfolio is contained in
Schedule III, Real Estate and Accumulated
Depreciation and in our audited financial statements
contained in this Annual Report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating | |
|
|
|
|
Number of | |
|
Number of | |
|
Trust | |
|
Percentage | |
|
|
Communities | |
|
Units | |
|
Investment | |
|
Leased(1) | |
|
|
| |
|
| |
|
| |
|
| |
OPERATING APARTMENT COMMUNITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, Georgia
|
|
|
8 |
|
|
|
2,459 |
|
|
$ |
203,824 |
|
|
|
97.2 |
% |
|
Austin, Texas
|
|
|
2 |
|
|
|
714 |
|
|
|
34,698 |
|
|
|
95.5 |
% |
|
Boston, Massachusetts
|
|
|
5 |
|
|
|
1,204 |
|
|
|
207,428 |
|
|
|
98.1 |
% |
|
Chicago, Illinois
|
|
|
4 |
|
|
|
1,313 |
|
|
|
144,975 |
|
|
|
94.8 |
% |
|
Dallas, Texas
|
|
|
4 |
|
|
|
930 |
|
|
|
48,537 |
|
|
|
96.8 |
% |
|
Denver, Colorado
|
|
|
6 |
|
|
|
1,949 |
|
|
|
167,129 |
|
|
|
95.8 |
% |
|
Houston, Texas
|
|
|
2 |
|
|
|
1,408 |
|
|
|
74,894 |
|
|
|
94.8 |
% |
|
Inland Empire, California
|
|
|
4 |
|
|
|
1,594 |
|
|
|
98,242 |
|
|
|
95.2 |
% |
|
Los Angeles County, California
|
|
|
14 |
|
|
|
4,162 |
|
|
|
810,623 |
|
|
|
86.9 |
% |
|
Orange County, California
|
|
|
7 |
|
|
|
1,647 |
|
|
|
181,064 |
|
|
|
97.7 |
% |
|
Orlando, Florida
|
|
|
1 |
|
|
|
312 |
|
|
|
21,706 |
|
|
|
98.7 |
% |
|
Phoenix, Arizona
|
|
|
2 |
|
|
|
876 |
|
|
|
53,880 |
|
|
|
96.5 |
% |
|
Portland, Oregon
|
|
|
1 |
|
|
|
228 |
|
|
|
13,757 |
|
|
|
95.2 |
% |
|
Raleigh, North Carolina
|
|
|
5 |
|
|
|
1,324 |
|
|
|
97,760 |
|
|
|
97.3 |
% |
|
San Diego, California
|
|
|
7 |
|
|
|
2,559 |
|
|
|
293,040 |
|
|
|
98.0 |
% |
|
San Francisco Bay Area, California
|
|
|
12 |
|
|
|
4,735 |
|
|
|
637,703 |
|
|
|
95.9 |
% |
|
Seattle, Washington
|
|
|
7 |
|
|
|
2,808 |
|
|
|
236,583 |
|
|
|
94.9 |
% |
|
Southeast Florida
|
|
|
9 |
|
|
|
3,038 |
|
|
|
374,569 |
|
|
|
95.7 |
% |
|
Stamford, Connecticut
|
|
|
1 |
|
|
|
160 |
|
|
|
36,487 |
|
|
|
97.5 |
% |
|
Washington, D.C. Metropolitan Area
|
|
|
19 |
|
|
|
8,019 |
|
|
|
1,026,128 |
|
|
|
97.7 |
% |
|
West Coast Florida
|
|
|
3 |
|
|
|
746 |
|
|
|
44,373 |
|
|
|
97.7 |
% |
|
Ventura County, California
|
|
|
1 |
|
|
|
400 |
|
|
|
33,175 |
|
|
|
96.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Community Subtotal/ Average
|
|
|
124 |
|
|
|
42,585 |
|
|
$ |
4,840,575 |
|
|
|
95.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, Massachusetts
|
|
|
3 |
|
|
|
693 |
|
|
$ |
178,939 |
|
|
|
98.3 |
% |
|
Chicago, Illinois
|
|
|
5 |
|
|
|
3,025 |
|
|
|
516,756 |
|
|
|
93.8 |
% |
|
New York City Metropolitan Area
|
|
|
3 |
|
|
|
1,062 |
|
|
|
460,182 |
|
|
|
97.6 |
% |
|
Southeast Florida
|
|
|
1 |
|
|
|
240 |
|
|
|
27,989 |
|
|
|
93.3 |
% |
|
Washington, D.C. Metropolitan Area
|
|
|
31 |
|
|
|
10,881 |
|
|
|
1,994,217 |
|
|
|
96.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Subtotal/ Average
|
|
|
43 |
|
|
|
15,901 |
|
|
$ |
3,178,083 |
|
|
|
95.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Apartment Communities Subtotal/ Average
|
|
|
167 |
|
|
|
58,486 |
|
|
$ |
8,018,658 |
|
|
|
95.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating | |
|
|
|
|
Number of | |
|
Number of | |
|
Trust | |
|
Percentage | |
|
|
Communities | |
|
Units | |
|
Investment | |
|
Leased(1) | |
|
|
| |
|
| |
|
| |
|
| |
APARTMENT COMMUNITIES UNDER CONSTRUCTION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, Massachusetts
|
|
|
1 |
|
|
|
134 |
|
|
$ |
40,292 |
|
|
|
53.0 |
% |
|
Long Island, New York
|
|
|
1 |
|
|
|
396 |
|
|
|
58,462 |
|
|
|
N/A |
|
|
Los Angeles County, California
|
|
|
3 |
|
|
|
1,002 |
|
|
|
143,989 |
|
|
|
N/A |
|
|
San Diego, California
|
|
|
1 |
|
|
|
451 |
|
|
|
73,206 |
|
|
|
72.1 |
% |
|
Ventura County, California
|
|
|
1 |
|
|
|
316 |
|
|
|
47,266 |
|
|
|
38.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Community Subtotal/ Average
|
|
|
7 |
|
|
|
2,299 |
|
|
$ |
363,215 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, Massachusetts
|
|
|
1 |
|
|
|
420 |
|
|
$ |
56,936 |
|
|
|
N/A |
|
|
Washington, D.C. Metropolitan Area
|
|
|
2 |
|
|
|
518 |
|
|
|
79,088 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Rise Property Subtotal/ Average
|
|
|
3 |
|
|
|
938 |
|
|
$ |
136,024 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartment Communities Under Construction Subtotal/ Average
|
|
|
10 |
|
|
|
3,237 |
|
|
$ |
499,239 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APARTMENT COMMUNITIES IN PLANNING AND OWNED(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities:
|
|
|
2 |
|
|
|
484 |
|
|
$ |
16,701 |
|
|
|
|
|
High-Rise Communities:
|
|
|
2 |
|
|
|
767 |
|
|
$ |
35,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apartment Communities In Planning and Owned Subtotal/
Average
|
|
|
4 |
|
|
|
1,251 |
|
|
$ |
51,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apartment Communities Owned at December 31, 2004
|
|
|
181 |
|
|
|
62,974 |
|
|
$ |
8,569,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER REAL ESTATE ASSETS(3)
|
|
|
|
|
|
|
|
|
|
|
69,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMERITON PORTFOLIO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Apartment Communities
|
|
|
10 |
|
|
|
3,189 |
|
|
|
358,431 |
|
|
|
|
|
|
|
Apartment Communities Under Construction
|
|
|
4 |
|
|
|
1,307 |
|
|
|
157,918 |
|
|
|
|
|
|
|
Apartment Communities In Planning and Owned and Other
|
|
|
6 |
|
|
|
1,702 |
|
|
|
65,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal/ Average
|
|
|
20 |
|
|
|
6,198 |
|
|
|
581,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Owned at December 31, 2004
|
|
|
201 |
|
|
|
69,172 |
|
|
$ |
9,221,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the percentage leased as of December 31, 2004.
For communities in Lease-Up, the percentage leased is based on
leased units divided by total number of units in the community
(completed and under construction) as of December 31, 2004.
A N/ A indicates markets with communities under
construction where Lease-Up has not yet commenced. |
|
(2) |
As of December 31, 2004, we had one investment representing
713 units classified as In Planning and Under Control. Our
actual investment in these communities was $1.5 million,
which is reflected in the Other assets caption of
our Balance Sheet. |
|
(3) |
Includes land that is not In Planning and other real estate
assets. |
21
Item 3. Legal
Proceedings
We are subject to the following claims in connection with
moisture infiltration and resulting mold issues at previously
owned high-rise properties in Southeast Florida.
Henriques, et al. v. Archstone-Smith Operating Trust,
et al., filed on August 27, 2002 (the
Henriques Claim), in the Circuit Court of the
Eleventh Judicial Circuit in and for Miami-Dade County, Florida,
on behalf of a class of residents at Harbour House. We reached a
court-approved settlement with the plaintiffs in this matter.
The case alleged that water infiltration and resulting mold
contamination at the property was caused by faulty
air-conditioning and had resulted in both personal injuries to
the plaintiffs and damage to their property. Based on the
settlement, we have recorded a liability for estimated legal
fees associated with known and anticipated costs for our counsel
and plaintiffs counsel, as well as estimated settlement
costs. We are working though the settlement process and
finalizing the claims for remaining claimants. Not all
plaintiffs accepted the court-approved settlement, and some of
these individuals have filed separate lawsuits or retained the
rights to file lawsuits at a later date. In the case where
separate lawsuits have been filed, we have either reached
settlements or are defending these claims in the normal course
of litigation. During 2004, we sold this property to an
unrelated third party. See Managements Discussion and
Analysis of Financial Conditions and Results of Operations in
this Annual Report for further discussion regarding this accrual.
Santos, et al. v. Archstone-Smith Operating Trust,
et al., filed on February 13, 2003, in the Circuit
Court of the Eleventh Judicial Circuit in and for Miami-Dade
County, Florida, on behalf of a class of residents at Harbour
House. The plaintiffs in this case make substantially the same
allegations as those made in the Henriques claim and seek
both injunctive relief and unspecified monetary and punitive
damages. We have reached individual settlement agreements with a
significant portion of the represented claimants and are in
discussion with the remaining individuals that are actually
represented by opposing counsel. We recorded a liability for
estimated legal fees associated with known and anticipated costs
for our counsel and plaintiffs counsel, as well as
estimated settlement costs. During 2004, we sold this property
to an unrelated third party. See Managements Discussion
and Analysis of Financial Conditions and Results of Operations
in this Annual Report for further discussion regarding this
accrual.
Bercovits et al., v. Archstone-Smith Operating
Trust, et al. (formerly known as Semidey,
et al., v. Archstone-Smith Operating Trust,
et al. and Sullivan, et al., v. Archstone-Smith
Operating Trust, et al.) was filed on October 27,
2004, in the Circuit Court of the Eleventh Judicial Circuit in
and for Miami-Dade County, Florida, on behalf of the class of
residents at the property. The plaintiffs in this case made
substantially the same allegations as those made in the
Henriques claim and are seeking both injunctive relief
and unspecified monetary and punitive damages. We have reached
settlements with the named plaintiffs in the previous cases;
however, opposing counsel amended these complaints to name new
class representatives. We recorded a liability for estimated
legal fees associated with known and anticipated costs for our
counsel and plaintiffs counsel, as well as estimated
settlement costs. We continue to defend the remaining claims in
the normal course of litigation. During 2004, we sold this
property to an unrelated third party.
Equal Rights Center, et al. v. Archstone-Smith Trust,
et al., was filed on December 20, 2004, in the
federal district court in the State of Maryland by three
organizations that advocate on behalf of disabled individuals.
This case alleges various violations of the Fair Housing Act and
the Americans with Disabilities Act at 112 properties currently
or formerly owned by the Company. The plaintiffs are seeking
injunctive relief, in the form of retrofitting apartments and
public accommodations to comply with the Fair Housing Act and
the Americans with Disabilities Act, unspecified monetary
damages for the diversion of the plaintiffs resources to
address fair housing violations, punitive damages and
attorneys fees. We are in the process of evaluating the
claims asserted in this litigation. Due to the preliminary
nature of the litigation, it is not possible to predict or
determine the outcome of the legal proceeding, nor it is
reasonably possible to estimate the amount of loss, if any, that
would be associated with an adverse decision.
We are party to various other claims and routine litigation
arising in the ordinary course of business. We do not believe
that the results of any such claims and litigation, individually
or in the aggregate, will have a material adverse effect on our
business, financial position or results of operations.
22
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None
PART II
|
|
Item 5. |
Market for the Registrants Common Equity and Related
Stockholder Matters |
There is no established market for the Common Units of the
Operating Trust. Archstone-Smiths Common Shares are listed
on the New York Stock Exchange(NYSE: ASN). The following table
sets forth the distributions on units made by the Operating
Trust during the past three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Per Common Unit(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
1.24 |
|
|
$ |
0.77 |
|
|
$ |
1.33 |
|
|
Capital gains
|
|
|
1.48 |
|
|
|
0.94 |
|
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2.72 |
|
|
$ |
1.71 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
For federal income tax purposes, the following summaries reflect
the taxability of distributions paid on our Preferred Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 | |
|
2002 | |
|
|
|
|
| |
|
| |
Per Series A Convertible Preferred Unit(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
|
|
|
$ |
0.95 |
|
|
$ |
1.79 |
|
|
Capital gains
|
|
|
|
|
|
|
1.16 |
|
|
|
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
2.11 |
|
|
$ |
2.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 | |
|
2002 | |
|
|
|
|
| |
|
| |
Per Series C Preferred Unit(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.08 |
|
|
Capital gains
|
|
|
|
|
|
|
|
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Per Series D Preferred Unit(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
0.60 |
|
|
$ |
0.99 |
|
|
$ |
1.71 |
|
|
Capital gains
|
|
|
0.71 |
|
|
|
1.20 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1.31 |
|
|
$ |
2.19 |
|
|
$ |
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Per Series H, K, L Preferred Unit(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
1.55 |
|
|
$ |
1.52 |
|
|
$ |
2.62 |
|
|
Capital gains
|
|
|
1.85 |
|
|
|
1.86 |
|
|
|
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3.40 |
|
|
$ |
3.38 |
|
|
$ |
3.36 |
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Per Series I Preferred Unit(6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
3,501.00 |
|
|
$ |
3,447.00 |
|
|
$ |
5,982.46 |
|
|
Capital gains
|
|
|
4,159.00 |
|
|
|
4,213.00 |
|
|
|
1,677.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,660.00 |
|
|
$ |
7,660.00 |
|
|
$ |
7,660.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 | |
|
2002 | |
|
|
|
|
| |
|
| |
Per Series J Preferred Unit(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.34 |
|
|
Capital gains
|
|
|
|
|
|
|
|
|
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes a $1.00 per unit special dividend paid to our
unitholders of record on December 23, 2004. |
|
(2) |
The Series A Preferred Units were redeemed during October
2003. |
|
(3) |
The Series C Preferred Units were redeemed in full plus
accrued distributions during August 2002. |
|
(4) |
The Series D Preferred Units were redeemed in full plus
accrued distributions during August 2004. |
|
(5) |
The Series H, K and L Preferred Units were converted into
Common Units during May 2003, September 2004 and December 2004,
respectively. The distribution paid on the Series H, K and
L Preferred Units prior to conversion was $1.27 per share,
$2.55 per share and $3.40 per share, respectively. The
taxability of which is proportionate to the amounts listed in
the table above. |
|
(6) |
The Series I Preferred Units have a par value of
$100,000 per share. |
|
(7) |
The Series J Preferred Units were converted into Common
Units during July 2002. |
Distributions are paid on a quarterly basis and equal one-fourth
of the total annual amount listed above unless otherwise noted.
As of February 14, 2004 we had approximately 864 record
holders of A-1 Common Units and no beneficial holders of A-1
Common Units.
Our tax return for the year ended December 31, 2004 has not
been filed, and the taxability information for 2004 is based
upon the best available data we have. Our tax returns for prior
years have not been examined by the Internal Revenue Service
and, therefore, the taxability of the distributions may be
subject to change.
In 2004 and 2003 we issued 374,921 and 1,955,908 A-1 Common
Units of the Operating Trust as partial consideration for real
estate, respectively. All units were issued in transactions
exempt from registration under Section 4(2) of the
Securities Act of 1933 and the rules thereunder.
24
The following table summarizes the A-1 Common Units that were
repurchased for either cash or A-2 Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
Maximum Approximate | |
|
|
|
|
|
|
Shares Purchased as | |
|
Dollar Value That | |
|
|
Number of Units | |
|
Average Price Paid | |
|
Part of Publicly | |
|
May Yet Be Purchased | |
Period |
|
Purchased | |
|
per Unit | |
|
Announced Plan | |
|
Under the Plan | |
|
|
| |
|
| |
|
| |
|
| |
1/1/04 1/31/04
|
|
|
536,684 |
|
|
$ |
29.35 |
|
|
|
|
|
|
|
|
|
2/1/04 2/29/04
|
|
|
108,729 |
|
|
|
28.00 |
|
|
|
|
|
|
|
|
|
3/1/04 3/31/04
|
|
|
10,296 |
|
|
|
27.35 |
|
|
|
|
|
|
|
|
|
4/1/04 4/30/04
|
|
|
21,461 |
|
|
|
28.71 |
|
|
|
|
|
|
|
|
|
5/1/04 5/31/04
|
|
|
1,015,788 |
|
|
|
28.55 |
|
|
|
|
|
|
|
|
|
6/1/04 6/30/04
|
|
|
24,059 |
|
|
|
29.00 |
|
|
|
|
|
|
|
|
|
7/1/04 7/31/04
|
|
|
530,791 |
|
|
|
30.38 |
|
|
|
|
|
|
|
|
|
8/1/04 8/31/04
|
|
|
2,000 |
|
|
|
30.11 |
|
|
|
|
|
|
|
|
|
9/1/04 9/30/04
|
|
|
42,538 |
|
|
|
31.12 |
|
|
|
|
|
|
|
|
|
10/1/04 10/31/04
|
|
|
147,313 |
|
|
|
33.14 |
|
|
|
|
|
|
|
|
|
11/1/04 11/30/04
|
|
|
15,554 |
|
|
|
35.92 |
|
|
|
|
|
|
|
|
|
12/1/04 12/31/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,455,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Item 6. |
Selected Financial Data |
The following table provides selected financial data relating to
our historical financial condition and results of operations as
of and for each of the years ending December 31, 2000 to
2004. This data is qualified in its entirety by, and should be
read in conjunction with, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and related notes
that have been included or incorporated by reference in this
Annual Report. Prior years amounts have been restated for
amounts classified within discontinued operations. (in
thousands, except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operations Summary(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(3)
|
|
$ |
873,329 |
|
|
$ |
783,672 |
|
|
$ |
754,339 |
|
|
$ |
426,530 |
|
|
$ |
465,476 |
|
Property operating expenses (rental expenses and real estate
taxes)
|
|
|
301,649 |
|
|
|
257,429 |
|
|
|
255,542 |
|
|
|
119,968 |
|
|
|
134,569 |
|
Net Operating Income(4)
|
|
|
552,472 |
|
|
|
506,909 |
|
|
|
489,335 |
|
|
|
294,657 |
|
|
|
299,949 |
|
Depreciation on real estate investments
|
|
|
203,183 |
|
|
|
162,723 |
|
|
|
148,588 |
|
|
|
83,961 |
|
|
|
99,620 |
|
Interest expense
|
|
|
175,249 |
|
|
|
160,871 |
|
|
|
149,538 |
|
|
|
63,409 |
|
|
|
90,860 |
|
General and administrative expense
|
|
|
55,479 |
|
|
|
49,838 |
|
|
|
45,710 |
|
|
|
27,434 |
|
|
|
24,303 |
|
Earnings from operations
|
|
|
131,797 |
|
|
|
116,932 |
|
|
|
137,947 |
|
|
|
100,078 |
|
|
|
101,887 |
|
Gains on dispositions of depreciated real estate, net(5)
|
|
|
|
|
|
|
|
|
|
|
35,950 |
|
|
|
108,748 |
|
|
|
101,251 |
|
Income from unconsolidated entities
|
|
|
17,902 |
|
|
|
5,745 |
|
|
|
53,602 |
|
|
|
10,998 |
|
|
|
(449 |
) |
Net earnings from discontinued operations(6)
|
|
|
434,302 |
|
|
|
371,514 |
|
|
|
134,441 |
|
|
|
53,572 |
|
|
|
66,163 |
|
Preferred Unit distributions
|
|
|
16,254 |
|
|
|
26,153 |
|
|
|
34,309 |
|
|
|
25,877 |
|
|
|
25,340 |
|
Net earnings attributable to Common Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
596,369 |
|
|
|
468,038 |
|
|
|
322,416 |
|
|
|
239,697 |
|
|
|
236,045 |
|
|
Diluted
|
|
|
600,124 |
|
|
|
480,910 |
|
|
|
322,416 |
|
|
|
250,917 |
|
|
|
244,625 |
|
Common Share distributions
|
|
|
603,553 |
|
|
|
365,009 |
|
|
|
344,590 |
|
|
|
221,196 |
|
|
|
201,257 |
|
Per Unit Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Common Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.71 |
|
|
$ |
2.20 |
|
|
$ |
1.59 |
|
|
$ |
1.78 |
|
|
$ |
1.79 |
|
|
Diluted
|
|
|
2.69 |
|
|
|
2.18 |
|
|
|
1.58 |
|
|
|
1.77 |
|
|
|
1.78 |
|
Common Unit cash distributions paid(7)
|
|
|
2.72 |
|
|
|
1.71 |
|
|
|
1.70 |
|
|
|
1.64 |
|
|
|
1.54 |
|
Cash distributions paid per Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Unit(8)
|
|
|
|
|
|
|
2.11 |
|
|
|
2.29 |
|
|
|
2.21 |
|
|
|
2.07 |
|
|
Series B Preferred Unit(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.79 |
|
|
|
2.25 |
|
|
Series C Preferred Unit(10)
|
|
|
|
|
|
|
|
|
|
|
1.38 |
|
|
|
2.16 |
|
|
|
2.16 |
|
|
Series D Preferred Unit(11)
|
|
|
1.31 |
|
|
|
2.19 |
|
|
|
2.19 |
|
|
|
2.19 |
|
|
|
2.19 |
|
|
Series E Preferred Unit(12)
|
|
|
2.09 |
|
|
|
2.09 |
|
|
|
0.70 |
|
|
|
|
|
|
|
|
|
|
Series F Preferred Unit(12)
|
|
|
1.50 |
|
|
|
2.03 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
|
|
Series G Preferred Unit(12)
|
|
|
2.16 |
|
|
|
2.16 |
|
|
|
0.72 |
|
|
|
|
|
|
|
|
|
|
Series H, J, K and L Preferred Units(13)
|
|
|
|
|
|
|
3.38 |
|
|
|
3.36 |
|
|
|
|
|
|
|
|
|
|
Series I Preferred Unit(13)(14)
|
|
|
7,660.00 |
|
|
|
7,660.00 |
|
|
|
7,660.00 |
|
|
|
|
|
|
|
|
|
Weighted average Common Units outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
220,053 |
|
|
|
212,288 |
|
|
|
202,781 |
|
|
|
134,589 |
|
|
|
131,874 |
|
|
Diluted
|
|
|
223,187 |
|
|
|
220,758 |
|
|
|
203,804 |
|
|
|
142,090 |
|
|
|
137,730 |
|
26
|
|
|
|
(1) |
Includes Ameriton for all years presented. |
|
|
(2) |
Net earnings from discontinued operations have been reclassified
for all years presented. |
|
|
(3) |
Annual revenues inclusive of discontinued operations for 2004,
2003, 2002, 2001 and 2000 were $987 million,
$1.0 billion, $1.0 billion, $737 million and
$732 million, respectively. |
|
|
(4) |
Defined as rental revenues less rental expenses and real estate
taxes. We believe that net earnings attributable to Common Units
and NOI are the most relevant measures of our operating
performance and allow investors to evaluate our business against
our industry peers and against all publicly traded companies as
a whole. We rely on NOI for purposes of making decisions about
resource allocations and assessing segment performance. We also
believe NOI is a valuable means of comparing period-to-period
property performance. See Item 7 of this Annual Report
under the caption Apartment Community Operations
for a reconciliation of NOI to Earnings from Operations. |
|
|
(5) |
Gains on the disposition of real estate investments classified
as held for sale after January 1, 2002 are included in
discontinued operations. |
|
|
(6) |
Represents property-specific components of net earnings and
gains/losses on the disposition of real estate classified as
held for sale subsequent to January 1, 2002. |
|
|
(7) |
Includes a $1.00 per share special distribution issued to
our Common Unitholders in December 2004. |
|
|
(8) |
The Series A Preferred Units were called for redemption
during October 2003; of the 2.9 million Preferred Units
outstanding, 2.8 million were converted to Common Units and
the remaining were redeemed. |
|
|
(9) |
All of the outstanding Series B Preferred Units were
redeemed on May 2001. During 2001, cash distributions of
$0.79 per share were paid for the period prior to the
redemption. |
|
|
(10) |
All of the outstanding Series C Preferred Units were
redeemed at liquidation value plus accrued distributions in
August 2002. |
|
(11) |
All of the outstanding Series D Preferred Units were
redeemed at liquidation value plus accrued distributions in
August 2004. |
|
(12) |
In August 2002, the DownREIT Perpetual Preferred Units were
converted into Operating Trust Perpetual Preferred Units.
The Company redeemed the Series F Preferred Units in
September 2004, 520,000 of the Series E Preferred Units in
August 2004 and 400,000 of the Series E Preferred Units in
November 2004. |
|
(13) |
The Series L Preferred Units were converted into Common
Units during December 2004 and the distribution paid during 2004
prior to conversion was $3.40 per share. In September 2004,
the Series K Preferred Units were converted into Common
Units and the distribution paid during 2004 prior to conversion
was $2.55 per share. The Series H Preferred Units were
converted into Common Units during May 2003 and the distribution
paid during 2003 prior to conversion was $1.27 per share.
In July 2002, Series J Preferred Units were converted into
Common Units. During the fourth quarter 2001, we paid
approximately $5.8 million of distributions on the
Series H, I, J, K and L Preferred Units that were
declared by Smith Residential prior to the Smith Merger. |
|
(14) |
Series I Preferred Units have a par value of
$100,000 per share. |
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned, at cost
|
|
$ |
8,958,195 |
|
|
$ |
8,783,349 |
|
|
$ |
9,132,183 |
|
|
$ |
8,565,787 |
|
|
$ |
5,267,554 |
|
Real estate held for sale(1)
|
|
|
262,843 |
|
|
|
215,831 |
|
|
|
165,552 |
|
|
|
46,426 |
|
|
|
46,046 |
|
Investments in and advances to unconsolidated entities
|
|
|
111,481 |
|
|
|
86,367 |
|
|
|
116,594 |
|
|
|
240,719 |
|
|
|
64,993 |
|
Total assets
|
|
|
9,066,044 |
|
|
|
8,921,695 |
|
|
|
9,096,026 |
|
|
|
8,700,722 |
|
|
|
5,117,459 |
|
Unsecured credit facilities
|
|
|
19,000 |
|
|
|
103,790 |
|
|
|
365,578 |
|
|
|
188,589 |
|
|
|
193,719 |
|
Long-Term Unsecured Debt
|
|
|
2,099,132 |
|
|
|
1,871,965 |
|
|
|
1,776,103 |
|
|
|
1,333,890 |
|
|
|
1,401,262 |
|
Total liabilities
|
|
|
4,474,768 |
|
|
|
4,184,592 |
|
|
|
4,704,299 |
|
|
|
4,305,117 |
|
|
|
2,767,774 |
|
Other Common Unitholders interest (at redemption value)
|
|
|
885,400 |
|
|
|
707,924 |
|
|
|
579,598 |
|
|
|
669,502 |
|
|
|
|
|
Preferred Units
|
|
|
69,522 |
|
|
|
210,120 |
|
|
|
355,221 |
|
|
|
374,114 |
|
|
|
286,856 |
|
Total unitholders equity
|
|
|
3,703,826 |
|
|
|
4,017,669 |
|
|
|
3,799,141 |
|
|
|
3,631,518 |
|
|
|
2,251,606 |
|
Number of Common Units outstanding
|
|
|
222,694 |
|
|
|
220,063 |
|
|
|
205,328 |
|
|
|
199,973 |
|
|
|
122,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
369,772 |
|
|
$ |
343,696 |
|
|
$ |
392,043 |
|
|
$ |
332,153 |
|
|
$ |
322,077 |
|
|
Investing activities
|
|
|
552,388 |
|
|
|
428,166 |
|
|
|
(137,401 |
) |
|
|
387,694 |
|
|
|
71,789 |
|
|
Financing activities
|
|
|
(724,135 |
) |
|
|
(779,478 |
) |
|
|
(248,823 |
) |
|
|
(721,897 |
) |
|
|
(394,861 |
) |
|
|
(1) |
Previous years have been restated to include assets that were
classified as sold or held for sale as of December 31, 2004. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The Operating Trust is a public equity REIT that is engaged
primarily in the operation, development, redevelopment,
acquisition, management and long-term ownership of apartment
communities throughout the United States. The Company is
structured as an UPREIT, with all property ownership and
business operations conducted through the Operating Trust and
its subsidiaries and affiliates. Archstone-Smith is our sole
trustee and owns 89.1% of the Operating Trusts common
units as of December 31, 2004.
Results of Operations
We produced diluted net earnings per unit of $2.69 for the year
ended December 31, 2004, a 23.4% increase compared with the
$2.18 per unit reported for 2003. Our total unitholder
return of 48.8% in 2004 exceeded the NAREIT Apartment Index and
S&P 500 Index equivalent returns by 1,407 and
3,791 basis points, respectively. We also closed out 2004
on a high note with the announcement that Archstone-Smith was
being added to the S&P 500 Index in December.
Our Same-Store revenues were up 0.2% for the full year in 2004.
The increase in Same-Store revenues represents the first time
annual Same-Store revenue growth has been positive since 2001.
The Washington D.C. metropolitan area, Southern California and
Southeast Florida, which collectively represent 63% of the
companys portfolio, produced annual Same-Store revenue
growth of 1.9%, 3.0% and 2.4%, respectively. Our
28
most challenging core-markets during 2004 were the
San Francisco Bay Area and Chicago, which produced negative
revenue growth of 3.6% and 3.3%, respectively. Our Same-Store
expenses increased 3.7% and NOI declined 1.6% for the full year
in 2004.
The REIT completed $1.4 billion of non-core asset sales in
2004, including dispositions totaling $616.5 million in the
fourth quarter. The 2004 dispositions produced GAAP gains of
$372.2 million and an unleveraged internal rate of return
of 13.8%. As a result of the significant gains generated by
these asset sales, we paid a $1.00 per unit special
distribution to unitholders in December 2004. Additionally,
Ameriton completed the sale of $360 million of assets
producing pre-tax gains of $65.1 million. The REIT acquired
$866.2 million of apartment communities in 2004 excluding
Ameriton, representing 3,753 units, in markets that include
the New York metropolitan area, Los Angeles County, Southeast
Florida and the Washington, D.C. metropolitan area. These
acquisitions were funded principally with tax-deferred exchange
proceeds from asset dispositions.
The REIT currently has $952.5 million in operating and
joint venture properties under construction in markets that
include Southern California and the Washington, D.C.
metropolitan area, as well as $487.2 million of
developments in planning. In addition, Ameriton has
$194.8 million of development under construction and
$205.6 million in planning. We expect our substantial
development pipeline to contribute significantly to our earnings
growth rate over the next five years as these projects are
completed and stabilized.
In conjunction with our capital recycling strategy, rental
revenues and rental expenses, including real estate taxes, will
fluctuate based upon the timing and volume of dispositions,
acquisitions and development lease-ups. Accordingly, our results
are not only driven by the performance of our operating
portfolio, but also by gains/losses from the disposition of real
estate, the corresponding loss of ongoing income from assets
sold, and increased income generated from acquisitions and new
developments. These factors all contribute to the overall
financial performance of the Company.
Basic net earnings attributable to Common Units increased
$128.3 million, or 27.4%, in 2004 as compared to 2003. This
increase is primarily attributable to:
|
|
|
|
|
Increased revenues partially offset by a corresponding increase
in operating expenses associated with $1.1 billion and
$508.9 million in asset acquisitions, inclusive of
Ameriton, that occurred during 2004 and 2003, respectively; |
|
|
|
Increased income from the continued lease-up of new development
projects; |
|
|
|
A $92.8 million increase in gains from the sale of
operating communities, which includes gains from the sale of
assets by Ameriton; |
|
|
|
A $29.9 million decrease in other expenses primarily due to
lower moisture infiltration and resulting mold-related expenses
recognized during 2004; |
|
|
|
Non-operating income of $28.2 million, from the sale and
settlement of forward contracts on marketable equity securities
resulting in a gain of $24.9 million, and the disposition
of our property management business, resulting in a
$3.3 million gain, during 2004; |
|
|
|
A $12.2 million increase in income from unconsolidated
entities, primarily related to the recognition of
$3.2 million of contingent proceeds associated with the
expiration of certain indemnifications from the sale of CES,
which was sold in 2002, and $13.9 million of gains from the
sale of joint venture operating assets during 2004 compared to
$7.4 million of gains in 2003; and, |
|
|
|
A $10.1 million reduction in Preferred Unit distributions
due to the conversion of Series A and H Preferred Units
during 2003, the redemption of Series D Preferred Units in
August 2004, the conversion of Series K Preferred Units in
September 2004 and the early conversion of Series L
Preferred Units in December 2004. These conversions and the
redemption also eliminated the impact of the related Preferred
Unit distributions on our fixed charge coverage ratio. |
29
These increases were partially offset by:
|
|
|
|
|
A 3.7% increase in Same-Store expenses during 2004 as compared
to 2003 primarily due to increases in personnel costs and real
estate taxes at both our garden and high-rise properties (our
Same-Store population excludes Ameriton properties, as they are
acquired or developed to achieve short-term opportunistic gains,
and therefore, the average holding period is typically much
shorter than the holding period of assets operated by the REIT); |
|
|
|
The loss of rental revenues and a corresponding decrease in
rental expenses due to $1.8 billion and $1.6 billion
in dispositions, including Ameriton, during 2004 and 2003,
respectively; and, |
|
|
|
A $4.7 million charge, net of anticipated insurance
recoveries, associated with damage from hurricanes in Florida. |
Basic net earnings attributable to Common Units increased
approximately $145.6 million, or 45.2%, in 2003 as compared
to 2002. This increase is largely attributable to:
|
|
|
|
|
Higher gains in 2003 of $353.6 million as compared to
$139.6 million during 2002, associated with an increase in
the dispositions of depreciated real estate assets; |
|
|
|
Lower interest expense associated with lower debt extinguishment
costs and lower debt balances during 2003 and a reduction in
interest rates on floating rate debt and refinanced debt; |
|
|
|
A reduction in Preferred Unit distributions during 2003 due to
the conversion of Series A and Series H Preferred
Units into Common Units in 2003 and the conversion of
Series J Preferred Units into Common Units and the
redemption of Series A Preferred Units during 2002; and |
|
|
|
Increased rental revenue and corresponding increase in rental
expense due to the acquisition of operating communities and the
continued lease-up and stabilization of development communities. |
These increases were partially offset by:
|
|
|
|
|
A decline in rental revenue from our Same-Store portfolio of
1.4% for the twelve months ended December 31, 2003 as
compared to the same period in 2002, primarily due to a decline
in potential effective rent per unit and a decrease in average
occupancy; |
|
|
|
The loss of rental revenue and a corresponding decrease in
rental expense due to $1.6 billion and $602.1 million
in dispositions during the twelve months ended December 31,
2003 and 2002, respectively; and |
|
|
|
An increase of $24.8 million in expenses associated with
moisture infiltration and resulting mold during 2003 as compared
to 2002. |
30
|
|
|
Apartment Community Operations |
We utilize NOI as the primary measure to evaluate the
performance of our operating communities. NOI is defined as
rental revenues less rental expenses and real estate taxes for
each of our operating properties. We rely on NOI for purposes of
making decisions about resource allocations and assessing
segment performance. We also believe NOI is a valuable means of
comparing period-to-period property performance. The following
is a reconciliation of NOI to earnings from operations (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net operating income
|
|
$ |
552,472 |
|
|
$ |
506,909 |
|
|
$ |
489,335 |
|
|
Other income
|
|
|
19,208 |
|
|
|
19,334 |
|
|
|
9,462 |
|
|
Depreciation of real estate investments
|
|
|
(203,183 |
) |
|
|
(162,723 |
) |
|
|
(148,588 |
) |
|
Interest expense
|
|
|
(175,249 |
) |
|
|
(160,871 |
) |
|
|
(149,538 |
) |
|
General and administrative expenses
|
|
|
(55,479 |
) |
|
|
(49,838 |
) |
|
|
(45,710 |
) |
|
Other expense
|
|
|
(5,972 |
) |
|
|
(35,879 |
) |
|
|
(17,014 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
$ |
131,797 |
|
|
$ |
116,932 |
|
|
$ |
137,947 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, investments in operating apartment
communities comprised over 99% of our total real estate
portfolio, based on NOI. The following table summarizes the
performance of our operating portfolio (in thousands, except for
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Rental revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
$ |
526,271 |
|
|
$ |
465,368 |
|
|
$ |
458,538 |
|
|
High-rise properties
|
|
|
303,073 |
|
|
|
284,640 |
|
|
|
273,494 |
|
|
Ameriton
|
|
|
21,501 |
|
|
|
11,053 |
|
|
|
7,742 |
|
|
Non-multifamily
|
|
|
3,276 |
|
|
|
3,277 |
|
|
|
5,103 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
854,121 |
|
|
|
764,338 |
|
|
|
744,877 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (rental expenses and real estate taxes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
181,060 |
|
|
|
150,278 |
|
|
|
150,073 |
|
|
High-rise properties
|
|
|
108,879 |
|
|
|
101,568 |
|
|
|
100,272 |
|
|
Ameriton
|
|
|
11,242 |
|
|
|
4,920 |
|
|
|
3,838 |
|
|
Non-multifamily
|
|
|
468 |
|
|
|
663 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
301,649 |
|
|
|
257,429 |
|
|
|
255,542 |
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
345,211 |
|
|
|
315,090 |
|
|
|
308,465 |
|
|
High-rise properties
|
|
|
194,195 |
|
|
|
183,072 |
|
|
|
173,222 |
|
|
Ameriton
|
|
|
10,259 |
|
|
|
6,133 |
|
|
|
3,904 |
|
|
Non-multifamily
|
|
|
2,807 |
|
|
|
2,614 |
|
|
|
3,744 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net operating income
|
|
|
552,472 |
|
|
|
506,909 |
|
|
|
489,335 |
|
|
|
|
|
|
|
|
|
|
|
NOI classified as discontinued operations
|
|
|
61,494 |
|
|
|
128,664 |
|
|
|
199,953 |
|
|
|
|
|
|
|
|
|
|
|
NOI including discontinued operations
|
|
$ |
613,966 |
|
|
$ |
635,573 |
|
|
$ |
689,288 |
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Operating margin (NOI/rental revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
65.6 |
% |
|
|
67.7 |
% |
|
|
67.3 |
% |
|
High-rise properties
|
|
|
64.1 |
% |
|
|
64.3 |
% |
|
|
63.3 |
% |
Average occupancy during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
94.7 |
% |
|
|
95.0 |
% |
|
|
95.0 |
% |
|
High-rise properties
|
|
|
95.2 |
% |
|
|
93.2 |
% |
|
|
93.8 |
% |
The following table reflects revenue, expense and NOI
growth/(decline) for Same-Store communities that were fully
operating during each respective comparison period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store | |
|
Same-Store | |
|
Same-Store | |
|
|
Revenue | |
|
Expense | |
|
NOI | |
|
|
Growth/ | |
|
Growth/ | |
|
Growth/ | |
|
|
(Decline) | |
|
(Decline) | |
|
(Decline) | |
|
|
| |
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden
|
|
|
0.0 |
% |
|
|
4.6 |
% |
|
|
(2.1 |
%) |
|
High-Rise
|
|
|
0.4 |
% |
|
|
2.3 |
% |
|
|
(0.6 |
%) |
|
Total
|
|
|
0.2 |
% |
|
|
3.7 |
% |
|
|
(1.6 |
%) |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden
|
|
|
(2.4 |
)% |
|
|
(2.0 |
)% |
|
|
(2.6 |
%) |
|
High-Rise
|
|
|
0.3 |
% |
|
|
(1.0 |
)% |
|
|
1.0 |
% |
|
Total
|
|
|
(1.4 |
)% |
|
|
(1.6 |
)% |
|
|
(1.3 |
%) |
|
|
|
2004 vs. 2003 NOI Analysis |
NOI increased by $45.6 million, or 9.0%, during 2004 as
compared to 2003. Of this increase, $30.1 million was
produced by our garden communities, $11.1 million by our
high-rise portfolio, $4.1 million by Ameriton and the
remainder by non-multifamily assets.
The $30.1 million increase in garden NOI during 2004 as
compared to 2003 was primarily attributable to the acquisition
of six garden communities for a total of $443.9 million and
the ongoing lease-up and stabilization of development
communities during 2004. This increase was partially offset by a
2.1% decline in Same-Store NOI primarily due to higher site and
regional personnel costs and real estate taxes.
The $11.1 million increase in high-rise NOI during 2004
compared to 2003 was primarily attributable to the acquisition
of two high-rise properties in the New York area and two in the
Washington D.C. metropolitan market for a total of
$379.0 million during 2004. This increase was partially
offset by a 0.6% decline in Same-Store NOI also attributable to
higher site and regional personnel costs and real estate taxes.
The $4.1 million increase in Ameriton NOI during 2004 as
compared to 2003 was primarily attributable to the acquisition
of 12 Ameriton communities and the ongoing lease-up and
stabilization of Ameriton developments during 2004. This
increase was partially offset by the loss of NOI from nine
Ameriton dispositions during 2004.
NOI for our entire portfolio, including properties classified
within discontinued operations, decreased by $21.6 million,
or 3.4%, during 2004 as compared to 2003. This net decrease in
NOI was primarily attributable to:
|
|
|
|
|
The loss of NOI from the disposition of $1.8 billion and
$1.6 billion in operating assets, including Ameriton,
during 2004 and 2003, respectively; |
|
|
|
A decline in Same-Store NOI of 2.1% at our garden communities
primarily due to 4.6% higher Same-Store expenses in 2004
compared to 2003 resulting from higher property taxes and site
and regional personnel costs. Garden rental revenues were flat
in 2004, due principally to improvements in the |
32
|
|
|
|
|
Washington D.C. metropolitan area and Southern California
markets offset by continuing weakness in the Bay Area and
Atlanta; and, |
|
|
|
A decline in Same-Store NOI of 0.6% for our high-rise properties
primarily due to increased personnel costs and increased
property taxes. These expense increases were partially offset by
0.4% higher revenues due to continued improvements in the
Washington D.C. metropolitan market where we have the majority
of our high-rise properties offset by ongoing weakness in
Chicago. |
This decrease was partially offset by increased NOI from the
acquisitions, lease-ups and redevelopments described previously,
as well as an increase in NOI associated with assets classified
as held-for-sale, some of which related to Ameriton lease-ups
during 2003.
|
|
|
2003 vs. 2002 NOI Analysis |
NOI increased by $17.6 million, or 3.6%, during 2003 as
compared to 2002. Of this increase, $6.6 million was
produced by our garden communities, $9.9 million by our
high-rise portfolio and $2.2 million by Ameriton. These
increases were partially offset by a decrease in NOI from
non-multifamily assets.
The $6.6 million increase in garden NOI during 2003 as
compared to 2002 was primarily attributable to the acquisition
of 10 garden communities for a total of $523.5 million
and the ongoing lease-up and stabilization of development
communities during 2003. This increase was partially offset by a
2.6% decline in Same-Store NOI.
The $9.9 million increase in high-rise NOI during 2003 as
compared to 2002 was primarily attributable to an increase in
Same-Store NOI of 1.0% in 2003 compared to 2002.
The $2.2 million increase in Ameriton NOI during 2003 as
compared to 2002 was primarily attributable to the ongoing
lease-up and stabilization of Ameriton developments. This
increase was partially offset by the loss of NOI from the six
Ameriton dispositions in 2003.
NOI for our entire portfolio, including properties classified
within discontinued operations, decreased by $53.7 million,
or 7.8%, during 2003 as compared to 2002. This net decrease in
NOI was primarily attributable to:
|
|
|
|
|
The loss of NOI from the disposition of $1.6 billion and
$602.1 million in operating assets, including Ameriton,
during 2003 and 2002, respectively; and |
|
|
|
A decline in Same-Store NOI of 2.6% for our garden communities
primarily due to a decrease in revenues in the Bay Area, Seattle
and Atlanta markets, which were impacted by challenging economic
conditions. |
This decrease was partially offset by increased NOI from the
acquisitions, lease-ups and redevelopments described previously,
as well as an increase of 1.0% in NOI from Same-Store high-rise
properties in 2003 as compared to 2002. This Same-Store NOI
increase was primarily due to increased Same-Store revenues in
the Washington D.C. market, where economic conditions remained
strong, partially offset by declining market conditions in
Chicago. Additionally, Same-Store expenses declined in 2003
compared to 2002, primarily due to lower cost of utilities and
administrative expenses.
There was no significant change in the amount of other income in
2004 as compared to 2003. Notable differences in the composition
of other income in 2004 as compared to 2003 were the collection
and recognition of $3.1 million related to the settlement
of an ongoing CES lawsuit during 2004, a decrease in the
collection of indemnified CES accounts receivable over
120 days of $4.4 million during 2004 as compared to
2003, an increase in gains related to the disposition of land of
$3.2 million during 2004 as compared to 2003, and
$5.7 million of dividend income on stock investments in
2003.
33
The $9.9 million, or 104.3%, increase in 2003 as compared
to 2002 was principally attributable to the collection of
$5.3 million of contingent proceeds related to
indemnification of certain CES accounts receivable over
120 days and $5.7 million of dividend income on stock
investments.
Depreciation expense increased $40.5 million, or 24.9%,
during 2004 as compared to 2003. This increase is primarily due
to a greater number of operating assets classified within
discontinued operations during the prior year, resulting in a
greater depreciation allocation to discontinued operations of
$23.8 million in 2003 as compared to 2004.
Including depreciation expense on properties classified within
discontinued operations, depreciation expense increased
$16.6 million (comprised of a $40.5 million increase
from continuing operations offset by a $23.9 million
decrease from discontinued operations), or 8.2%, during 2004 as
compared 2003. This increase is principally attributable to the
amortization of the intangible value of lease agreements
obtained in connection with apartment community acquisitions,
which are amortized over the average life of the underlying
lease. During 2004 and 2003, amortization of these intangible
assets was $16.4 million and $2.9 million,
respectively. Depreciation expense also increased due to the
disposition of assets with lower depreciable basis at
significant gains and the reinvestment of these proceeds into
assets with a higher depreciable basis.
The $14.1 million, or 9.5%, increase in depreciation
expense during 2003 as compared to 2002 is attributable to a
greater number of operating assets classified within
discontinued operations during the prior year. Including
depreciation expense on properties reported in discontinued
operations, depreciation expense decreased $3.3 million
(comprised of a $14.1 million increase from continuing
operations offset by a $17.4 million decrease from
discontinued operations), or 1.6%, in 2003 as compared to 2002
due principally to increased disposition activity during 2003.
Interest expense increased $14.4 million, or 8.9%, during
2004 as compared to 2003. This increase is primarily due to a
greater number of operating assets classified within
discontinued operations during the prior year, resulting in
$17.7 million higher interest allocated to discontinued
operations in 2003 as compared to 2004.
Including interest expense on properties reflected in
discontinued operations, interest expense decreased
$3.3 million (comprised of a $14.4 million increase
from continuing operations offset by a $17.7 million
decrease from discontinued operations), or 1.6%, in 2004 as
compared 2003. The decrease is primarily the result of a
reduction in weighted average debt interest rates and a decrease
in the average outstanding mortgage balance during 2004 as
compared to 2003, as we paid off secured debt during the year,
partially offset by an increase in the average outstanding
long-term debt balance in 2004 as compared to 2003.
The $11.3 million, or 7.6%, increase in interest expense
during 2003 as compared to 2002 is attributable to a greater
number of operating assets classified within discontinued
operations during the prior year. The $30.1 million
decrease in interest expense (comprised of a $11.3 million
increase from continuing operations offset by a
$41.4 million decrease from discontinued operations), or
12.4%, , including interest on properties reported in
discontinued operations in 2003 as compared to 2002, is the
result of lower debt balances, a reduction in interest rates on
floating rate debt and refinanced debt, and the repayment of
Long-Term Unsecured Debt with proceeds from our unsecured credit
facilities, which were at lower average interest rates during
the period.
|
|
|
General and Administrative Expenses |
The $5.6 million, or 11.3%, increase in general and
administrative expenses in 2004 as compared to 2003 is due
primarily to executive Common Share grants related to the
achievement of total shareholder return performance targets
associated with a three-year special incentive plan, an increase
in audit and consulting fees associated with Sarbanes-Oxley
compliance and the impact of the fourth quarter special
distribution on
34
DEUs earned on restricted share units and some employee share
options. These expenses were partially offset by lower severance
costs and payroll expense in 2004 as compared to 2003.
The $4.1 million, or 9.0%, increase in general and
administrative expenses in 2003 as compared to 2002 relates
primarily to additional severance costs and legal fees incurred
during 2003, as well as increased depreciation of capitalized
costs associated with our revenue management system and our new
on-site property management software.
The $29.9 million, or 83.4%, decrease in other expense
during 2004 as compared to 2003 is primarily due to a
$29.0 million expense associated with moisture infiltration
and resulting mold recorded during 2003. The moisture
infiltration costs pertain to estimated and incurred legal fees
and estimated settlement costs, additional residential property
repair and replacement costs, and temporary resident relocation
expenses.
The $18.9 million, or 110.9%, increase in other expense in
2003 as compared to 2002 is primarily related to an increase in
moisture infiltration and resulting mold costs and a
$3.5 million increase in Ameriton income taxes. These
increases were partially offset by lower merger integration
costs associated with the Smith Merger as well as lower pursuit
cost write-offs during 2003.
|
|
|
Income from Unconsolidated Entities |
Income from unconsolidated entities increased
$12.2 million, or 211.6%, in 2004 as compared to 2003,
primarily due to gains from the sale of joint venture operating
communities and the recognition of contingent proceeds from the
expiration of certain indemnifications related to the sale of
CES. This was partially offset by $1.5 million in hurricane
losses from damage to unconsolidated Florida communities.
Income from unconsolidated entities decreased by
$47.9 million in 2003 as compared to 2002 primarily due to
the gain on sale of CES recognized in December 2002.
|
|
|
Other Non-Operating Income |
Other non-operating income increased by $28.2 million
during 2004 as compared to 2003 due to the recognition of
$24.9 million in gains from the sale and settlement of
marketable securities, and a $3.3 million gain from the
sale of our property management business in 2004. We had no
non-operating income during 2003 or 2002.
|
|
|
Preferred Unit Distributions |
Preferred Unit distributions decreased by $9.9 million, or
37.9%, during 2004 as compared to 2003. This decrease was
primarily due to the conversion of Series H Preferred Units
into Common Units in May 2003, the conversion of Series A
Preferred Units into Common Units in December 2003, the
redemption of our Series D Preferred Units in August 2004,
the conversion of Series K Preferred Units into Common
Units in September 2004 and the early conversion of
Series L Preferred Units into Common Units in December
2004. In August and November 2004, 520,000 and 400,000
Series E Perpetual Preferred Units were redeemed at
liquidation value plus accrued dividends. In September 2004, the
Series F Perpetual Preferred Units were redeemed at
liquidation value plus accrued dividends. These savings were
partially offset by the recognition of $1.7 million of
issuance costs related to the Series D Preferred Units. The
decrease in Preferred Unit distributions due to conversions was
offset by an increase in Common Unit distributions.
Preferred Unit distributions decreased by $8.2 million, or
23.8%, during 2003 as compared to 2002. This decrease was
primarily attributable to the conversion of Series A and
Series H Preferred Units into Common Units in 2003 and the
conversion of Series J Preferred Units into Common Units
during 2002, as well as the redemption of the Series C
Preferred Units in 2002. The decrease in Preferred Unit
distributions due to conversions was offset by an increase in
Common Unit distributions.
35
The results of operations for properties sold during the period
or designated as held-for-sale at the end of the period are
required to be classified as discontinued operations. The
property specific components of net earnings that are classified
as discontinued operations include rental revenues, rental
expenses, real estate taxes, depreciation expense, income taxes
and interest expense (actual interest expense for encumbered
properties and a pro-rata allocation of interest expense for any
unencumbered property up to our weighted average leverage
ratio), as well as the net gain or loss on the disposition of
properties.
Consistent with our capital recycling program, we had five
operating apartment communities, representing 1,952 units
(unaudited), classified as held for sale under the provisions of
SFAS No. 144, at December 31, 2004. Accordingly,
we have classified the operating earnings from these five
properties within discontinued operations for the years ended
December 31, 2004, 2003 and 2002. During the twelve months
ended December 31, 2004, we sold 30 REIT and Ameriton
operating communities. The operating results of these
30 communities and the related gain/loss on sale are also
included in discontinued operations for 2004, 2003 and 2002.
During the twelve months ended December 31, 2003, we sold
48 operating communities. The operating results of these
48 communities and the related gain/loss on the sale are
also included in discontinued operations for 2003 and 2002. In
addition, discontinued operations for the year ended
December 31, 2002 includes the net operating results of 12
operating communities and one retail property which were sold
during 2002.
The following is a summary of net earnings from discontinued
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Rental revenue
|
|
$ |
113,933 |
|
|
$ |
242,287 |
|
|
$ |
340,897 |
|
Rental expenses
|
|
|
(39,656 |
) |
|
|
(85,012 |
) |
|
|
(107,088 |
) |
Real estate taxes
|
|
|
(12,783 |
) |
|
|
(28,611 |
) |
|
|
(33,856 |
) |
Depreciation on real estate investments
|
|
|
(16,806 |
) |
|
|
(40,633 |
) |
|
|
(58,037 |
) |
Interest expense(1)
|
|
|
(33,503 |
) |
|
|
(51,195 |
) |
|
|
(92,651 |
) |
Income Taxes from taxable REIT subsidiaries
|
|
|
(21,567 |
) |
|
|
(12,206 |
) |
|
|
(10,455 |
) |
Provision for possible loss on real estate investment
|
|
|
|
|
|
|
(3,714 |
) |
|
|
(2,611 |
) |
Debt extinguishment costs related to dispositions
|
|
|
(1,763 |
) |
|
|
(3,002 |
) |
|
|
(5,412 |
) |
Gain from the disposition of REIT real estate investments, net
|
|
|
372,217 |
|
|
|
310,901 |
|
|
|
72,934 |
|
Gain from the dispositions of taxable REIT subsidiary real
estate investments, net
|
|
|
74,230 |
|
|
|
42,699 |
|
|
|
30,720 |
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
$ |
434,302 |
|
|
$ |
371,514 |
|
|
$ |
134,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The portion of interest expense included in discontinued
operations that is allocated to properties based on the
Companys leverage ratio was $23.2 million,
$32.7 million and $61.2 million for 2004, 2003 and
2002, respectively. |
Gains from the disposition of REIT assets are the result of our
capital recycling strategy, which redeploys capital from
non-core assets to more desirable locations within our core
markets. Gains or losses associated with REIT dispositions can
vary significantly from year-to-year given overall real estate
market conditions.
The majority of our gains from taxable REIT subsidiaries were
from Ameriton, which is a wholly owned taxable REIT subsidiary
that engages in the opportunistic acquisition, development and
eventual disposition of real estate with a short-term investment
horizon. While Ameriton has established a consistent track
record of producing significant gains, which contribute to our
overall net earnings, these gains or losses can fluctuate
significantly on a year-to-year basis depending on the relative
success of this component of our strategy.
36
Assets held for sale as of December 31, 2004, represented
gross real estate of $262.8 million and $215.8 million
with mortgages payable of $60.6 million and
$61.4 million at December 31, 2004 and 2003,
respectively. Additionally, of our investment in real estate and
debt balances at December 31, 2003, we disposed of
$1.5 billion of real estate and paid off related mortgages
of $85.8 million during the twelve months ended
December 31, 2004.
Liquidity and Capital Resources
We are committed to maintaining a strong balance sheet and
preserving our financial flexibility, which we believe enhances
our ability to capitalize on attractive investment opportunities
as they become available. As a result of the significant cash
flow generated by our operations, current cash positions, the
available capacity under our unsecured credit facilities, gains
from the disposition of real estate and ready access to the
capital markets by issuing securities under our existing shelf
registrations, we believe our liquidity and financial condition
are sufficient to meet all of our reasonably anticipated cash
flow needs during 2005.
Net cash flow provided by operating activities increased
$26.1 million, or 7.6%, in 2004 as compared to 2003. This
increase was principally due to lower moisture infiltration and
resulting mold-related expenses during 2004, lower interest
expense due to a reduction in the average debt rates and a
reduction in average debt balances during 2004, as well as
higher investment income from the sale of marketable equity
securities. See Results of Operations for a more complete
discussion of the factors impacting our operating performance.
Our net cash flows provided by operating activities decreased by
$48.3 million, or 12.3%, during 2003 as compared to 2002.
This decrease was principally due to lower net earnings before
gains on the disposition of depreciated real estate, payments
related to remediation of moisture infiltration and resulting
mold that were accrued in previous years and decreased
contributions from unconsolidated entities. See Results of
Operations for a more complete discussion of the factors
impacting our operating performance.
|
|
|
Investing and Financing Activities |
Net cash flows provided by investing activities increased by
$124.2 million, or 29.0%, in 2004 as compared to 2003. This
was due primarily to a $158.1 million increase in net
proceeds from the disposition of real estate assets during 2004
as compared to the same period of 2003, and proceeds from the
sale of marketable securities in 2004 that were acquired in
2003, which is included in Other, net in the
accompanying Condensed Consolidated Statement of Cash Flows. The
increase was partially offset by $122.8 million more spent
for acquisitions and development activity during 2004 as
compared to 2003. The disposition, acquisition and development
amounts above exclude transactions funded by tax-deferred
exchange proceeds.
Net cash flows provided by investing activities increased by
approximately $565.6 million in 2003 as compared to 2002.
This increase was primary attributable to a $984.1 million
increase in proceeds from the disposition of real estate assets
and a reduction in cash used to purchase marketable securities
during 2003 as compared to 2002. This was partially offset by an
increase in the balance of our tax-deferred escrow.
Net cash flows used in financing activities decreased by
$55.3 million, or 7.1%, in 2004 as compared to 2003, due to
increased borrowings to finance a net increase in real estate
investments during 2004 as compared to the prior year, partially
offset by an increase in cash used to repurchase Common and
Preferred Units and pay the special distribution in 2004.
Net cash used in financing activities increased by
$530.7 million, or 213.3%, in 2003 as compared to 2002.
This is principally due to a $438.8 million net reduction
in our unsecured credit facility and a $283.5 million
reduction in the total proceeds received from long-term
unsecured debt offerings. This increase in cash used in
financing activities was partially offset by a
$361.7 million reduction in principal payments on mortgages
payable.
37
Significant non-cash investing and financing activities for the
years ended December 31, 2004, 2003 and 2002 consisted of
the following:
|
|
|
|
|
Issued $10.8, $47.6 and $8.7 million of A-1 Common Units as
partial consideration for properties acquired during 2004, 2003
and 2002, respectively; |
|
|
|
Issued $4.5 million of A-2 Common Units as partial
consideration for real estate during 2004. |
|
|
|
Holders of Series K Preferred Units and Series L
Preferred Units converted $25.0 million each of their units
into Common Shares during 2004; |
|
|
|
Holders of Series H Preferred Units converted
$71.5 million of their units into Common Shares during 2003; |
|
|
|
Redeemed $47.9 million, $25.5 million and
$41.7 million A-1 Common Units for Common Shares during
2004, 2003 and 2002, respectively; |
|
|
|
Holders of Series J Preferred Units converted
$25 million of their units into Common Shares during 2002; |
|
|
|
Recorded an accrual related to moisture infiltration and
resulting mold remediation for $36.1 million and
$11.3 million at one of our high-rise properties in
Southeast Florida during 2003 and 2002, respectively; |
|
|
|
Assumed mortgage debt of $113.6 million, $55.4 million
and $195.6 million during 2004, 2003 and 2002,
respectively, in connection with the acquisition of apartment
communities; |
|
|
|
Holders of Series A Preferred Units converted
$71.9 million and $5.7 million of their units into
Common Shares during 2003 and 2002, respectively. |
|
|
|
Scheduled Debt Maturities and Interest Payment
Requirements |
We have structured the repayments of our long-term debt to
create a relatively level principal maturity schedule and to
avoid significant repayment obligations in any year which would
impact our financial flexibility. We have $313.7 million in
scheduled maturities during 2005, and we have
$295.5 million and $542.5 million of long-term debt
maturing during 2006 and 2007, respectively. See Note 5 in
our audited financial statements in this Annual Report for
additional information on scheduled debt maturities.
In April 2004, we filed a shelf registration statement on
Form S-3 to register an additional $450 million in
unsecured debt securities. This registration statement was
declared effective in April 2004. During August 2004, the
Operating Trust issued $300 million in long-term unsecured
ten-year notes with net proceeds of $297.1 million and with
a coupon rate of 5.6% and an effective interest rate of 5.8%
from its shelf registration statement. The proceeds were used to
repay outstanding balances on our unsecured credit facilities.
The notes were issued pursuant to a supplemental indenture with
modified debt covenants, which are specific to these notes. The
primary change pertains to the leverage covenant, which limits
total debt to 65% of the market value of total assets as
defined, using a capitalization rate of 7.5% to value stabilized
operating assets. As of December 31, 2004, we had
$700 million available in shelf registered debt securities
which can be issued subject to our ability to affect offerings
on satisfactory terms based on prevailing market conditions.
In December 2004, we restructured our unsecured revolving credit
facility provided by a group of financial institutions led by
JPMorgan Chase Bank. The primary modifications were extending
the maturity, reducing the pricing and lowering the
capitalization rate used to value the operating portfolio. The
$600 million facility matures in December 2007 and has a
one-year extension feature, exercisable at our option. The
facility bears interest at the greater of prime or the federal
funds rate plus 0.50%, or at our option, LIBOR plus 0.50%. The
spread over LIBOR can vary from LIBOR plus 0.425% to LIBOR plus
1.25% based upon the rating of our Long-Term Unsecured Debt. The
facility contains an accordion feature that allows us to expand
the commitment up to $900 million at any time during the
life of the facility, subject to lenders providing additional
commitments. Under the agreement, we pay a facility fee of 0.15%
of the commitment, which can vary from 0.125% to 0.200% based
upon the ratings of our Long-Term Unsecured Debt.
38
We also have a short-term unsecured borrowing agreement with
JPMorgan Chase Bank, which provides for maximum borrowings of
$100 million. The borrowings under the agreement bear
interest at an overnight rate agreed to at the time of borrowing
and ranged from 1.60% to 2.55% during 2004. There were no
borrowings outstanding under the agreement at December 31,
2004 and $6.8 million of borrowings outstanding under this
agreement at December 31, 2003.
We had $61 million outstanding on our unsecured line of
credit, $14 million outstanding under letters of credit and
an available balance of $625 million on our unsecured
credit facilities at February 14, 2004.
Our unsecured credit facilities, Long-Term Unsecured Debt and
mortgages payable had effective weighted average interest rates
of 2.62%, 6.23% and 5.24%, respectively, as of December 31,
2004. All of these rates give effect to debt issuance costs,
fair value hedges, the amortization of fair market value
purchase adjustments and other fees and expenses, as applicable.
Our debt instruments generally contain covenants common to the
type of facility or borrowing, including financial covenants
establishing minimum debt service coverage ratios and maximum
leverage ratios. We were in compliance with all financial
covenants pertaining to our debt instruments as of and for the
year ended December 31, 2004.
|
|
|
Unitholder Distribution Requirements |
Based on anticipated distribution levels for 2005 and the number
of units outstanding as of December 31, 2004, we anticipate
that we will pay the following distributions in 2005 (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
Total | |
|
|
| |
|
| |
Common Unit distributions:
|
|
|
|
|
|
|
|
|
|
Common Units(1)
|
|
$ |
1.73 |
|
|
$ |
345,625 |
|
|
A-1 Common Unit distributions(1)
|
|
|
1.73 |
|
|
|
39,993 |
|
|
Series E Preferred Unit distributions(2)
|
|
|
0.20 |
|
|
|
40 |
|
|
Series G Preferred Unit distributions(2)
|
|
|
0.38 |
|
|
|
228 |
|
|
Series I Preferred Unit distributions(3)
|
|
|
7,660.00 |
|
|
|
3,830 |
|
|
|
|
|
|
|
|
|
|
Total dividend/distribution requirements
|
|
|
|
|
|
$ |
389,716 |
|
|
|
|
|
|
|
|
|
|
(1) |
Future distributions on Common Units are contingent upon
approval by the Archstone-Smith Board of Trustees. |
|
(2) |
Distributions are prorated as we plan to redeem the remaining
Series E and G Preferred Units in February and March 2005,
respectively. |
|
(3) |
Series I Preferred Units have a par value of
$100,000 per unit. |
|
|
|
Unit Repurchase and Redemption Activity |
The following is a summary of our Preferred Unit activity since
2003:
|
|
|
|
|
In May 2003, the Series H Preferred Units were converted
into Common Units. |
|
|
|
In October 2003, we called the Series A Preferred Units for
redemption. Of the 2.9 million Series A Convertible
Preferred Units outstanding, 2.8 million were converted to
Common Units and the remaining were redeemed for cash and
retired. |
|
|
|
In September 2004, the Series K Preferred Units were
converted into Common Units. |
|
|
|
In August 2004, the Series D Preferred Units were redeemed
in full plus accrued distributions. |
|
|
|
In December 2004, the Series L Preferred Units were
converted into Common Units. |
39
In 2004 and 2003 we issued 374,921 and 1,955,908 A-1 Common
Units of the Operating Trust as partial consideration for real
estate, respectively. All units were issued in transactions
exempt from registration under Section 4(2) of the
Securities Act of 1933 and the rules thereunder.
Following is a summary of planned investments as of
December 31, 2004, including amounts for Ameriton (dollar
amounts in thousands). The amounts labeled
Discretionary represent future investments that we
plan to make, although there is not a contractual commitment to
do so. The amounts labeled Committed represent the
approximate amount that we are contractually committed to fund
for communities under construction in accordance with
construction contracts with general contractors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned Investments | |
|
|
| |
|
|
Units | |
|
Discretionary | |
|
Committed | |
|
|
| |
|
| |
|
| |
Communities under redevelopment
|
|
|
1,535 |
|
|
$ |
2,756 |
|
|
$ |
27,485 |
|
Communities under construction
|
|
|
4,894 |
|
|
|
|
|
|
|
458,453 |
|
Communities In Planning and owned
|
|
|
2,953 |
|
|
|
485,889 |
|
|
|
|
|
Communities In Planning and Under Control
|
|
|
713 |
|
|
|
101,349 |
|
|
|
|
|
Community acquisitions under contract
|
|
|
348 |
|
|
|
43,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,443 |
|
|
$ |
633,146 |
|
|
$ |
485,938 |
|
|
|
|
|
|
|
|
|
|
|
In addition to the planned investments noted above, we expect to
make additional investments relating to planned expenditures on
recently acquired communities as well as recurring expenditures
to improve and maintain our established operating communities.
We anticipate completion of most of the communities that are
currently under construction and the planned operating community
improvements during 2005 and 2006. We expect to start
construction on approximately $300-$350 million, based on
Total Expected Investment, of new development communities in
2005. We expect to fund the costs of these development projects
over a two-to-three year period following the date construction
commences. No assurances can be given that communities we do not
currently own will be acquired or that planned developments will
actually occur. In addition, actual costs incurred could be
greater or less than our current estimates.
We anticipate financing our planned investment and operating
needs primarily with cash flow from operating activities,
disposition proceeds from our capital recycling program,
existing cash balances and borrowings under our unsecured credit
facilities, prior to arranging long-term financing. We
anticipate that net cash flow from operating activities and
gains on dispositions during 2005 will be sufficient to fund
anticipated distribution requirements and debt principal
amortization payments. To fund planned investment activities, we
had $625 million in available capacity on our unsecured
credit facilities, $50 million of cash in tax-deferred
exchange escrow and $152 million of cash on hand at
February 14, 2005. In addition, we expect to complete the
disposition of $400 $700 million of REIT
operating communities during 2005.
In March 2003, we filed a shelf registration statement on
Form S-3 to register an additional $335 million in
unsecured debt securities. In June 2003, we issued
$250 million in long-term unsecured senior notes due in
June 2008 for net proceeds of $247.2 million. These notes
bear interest at a coupon rate of 3.0% annually, with an
effective interest rate of 3.2%. The net proceeds were used to
repay outstanding balances on our unsecured credit facility.
In April 2004, we filed a shelf registration statement on
Form S-3 to register an additional $450 million in
unsecured debt securities. This registration statement was
declared effective in April 2004. During August 2004, we issued
$300 million in long-term unsecured ten-year notes with net
proceeds of $297.1 million and with a coupon rate of 5.6%
and an effective interest rate of 5.8% from its shelf
registration statement. The proceeds were used to repay
outstanding balances on our unsecured credit facilities. The
notes were issued
40
pursuant to a supplemental indenture with modified debt
covenants, which are specific to these notes. The primary change
pertains to the leverage covenant, which limits total debt to
65% of the market value of total assets as defined, using a
capitalization rate of 7.5% to value stabilized operating
assets. As of December 31, 2004, we had $700 million
available in shelf registered debt securities which can be
issued subject to our ability to affect offerings on
satisfactory terms based on prevailing market conditions.
As of February 14, 2005, Archstone-Smith and the Operating
Trust collectively have $1.2 billion available in shelf
registered securities which can be issued based on our ability
to affect offerings on satisfactory terms based on prevailing
market conditions.
Litigation and Contingencies
We are subject to various claims in connection with moisture
infiltration and resulting mold issues at certain high-rise
properties in Southeast Florida. These claims generally allege
that water infiltration and resulting mold contamination
resulted in the claimants having personal injuries and/or
property damage. Although certain of these claims continue to be
at various stages of litigation, with respect to the majority of
these claims, we have either settled the claims and/or we have
been dismissed from the lawsuits that had been filed. With
respect to the lawsuits that have not been resolved, we continue
to defend these claims in the normal course of litigation.
We have recorded accruals for moisture infiltration and
resulting mold issues. These accruals represent
managements best estimate of the probable and reasonably
estimable costs and are based, in part, on the settlements
reached with the various claimants, estimates obtained from
third-party contractors and actual costs incurred to date. It is
possible that these estimates could increase or decrease as
additional information becomes available.
We are aggressively pursuing recovery of a significant portion
of these costs from our insurance carriers. We are in litigation
with our insurance providers, and therefore we have not recorded
an estimate for future insurance recoveries associated with
moisture infiltration and resulting mold. In addition, we will
continue to pursue potential recoveries from third parties whom
we believe bear responsibility for a considerable portion of the
costs we have incurred. We cannot make assurances that we will
obtain these recoveries or that our ultimate liability
associated with these claims will not be material to our results
of operations.
During 2004, we incurred estimated losses associated with
multiple hurricanes in Florida. As a result of this damage, we
recorded a loss contingency of approximately $5.5 million
associated with both wholly owned and unconsolidated apartment
communities. This charge is offset by a $750,000 receivable for
anticipated insurance recoveries. These estimates represent
managements best estimate of the probable and reasonably
estimable costs and are based on the most current information
available from our insurance adjustors.
During December 2004, a lawsuit was filed against us that
alleges various violations of the Fair Housing Act and the
Americans with Disabilities Act at 112 properties currently or
formerly owned by the Company. The plaintiffs are seeking
injunctive relief, in the form of retrofitting apartments and
public accommodations to comply with the Fair Housing Act and
the Americans with Disabilities Act; unspecified monetary
damages for the diversion of the plaintiffs resources to
address fair housing violations, punitive damages and
attorneys fees. We are in the process of evaluating the
claims asserted in this litigation. Due to the preliminary
nature of the litigation, it is not possible to predict or
determine the outcome of the legal proceeding, nor is it
reasonably possible to estimate the amount of loss, if any, that
would be associated with an adverse decision.
We are a party to various other claims and routine litigation
arising in the ordinary course of business. We do not believe
that the results of any such claims or litigation, individually
or in the aggregate, will have a material adverse effect on our
business, financial position or results of operations.
Critical Accounting Policies
We define critical accounting policies as those accounting
policies that require our management to exercise their most
difficult, subjective and complex judgments. Our management has
discussed the development and selection of all of these critical
accounting policies with our audit committee, and the audit
41
committee has reviewed the disclosure relating to these
policies. Our critical accounting policies relate principally to
the following key areas:
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Internal Cost Capitalization |
We have an investment organization that is responsible for
development and redevelopment of apartment communities.
Consistent with GAAP, all direct and certain indirect costs,
including interest and real estate taxes, incurred during
development and redevelopment activities are capitalized.
Interest is capitalized on real estate assets that require a
period of time to get them ready for their intended use. The
amount of interest capitalized is based upon the average amount
of accumulated development expenditures during the reporting
period. Included in capitalized costs are managements
estimates of the direct and incremental personnel costs and
indirect project costs associated with our development and
redevelopment activities. Indirect project costs consist
primarily of personnel costs associated with construction
administration and development accounting, legal fees, and
various office costs that clearly relate to projects under
development. Because the estimation of capitalizable internal
costs requires managements judgment, we believe internal
cost capitalization is a critical accounting
estimate.
If future accounting rules limit our ability to capitalize
internal costs or if our development activity decreased
significantly without a proportionate decrease in internal
costs, there could be an increase in our operating expenses. For
example, if hypothetically, we were to reduce our development
and land acquisition activity by 25% with no corresponding
decrease in internal costs, our net earnings per Common Unit
could decrease by approximately 1.0% or approximately $0.026
based on 2004 amounts.
Long-lived assets to be held and used are carried at cost and
evaluated for impairment when events or changes in circumstances
indicate such an evaluation is warranted. We also evaluate
assets for potential impairment when we deem them to be held for
sale. Valuation of real estate is considered a critical
accounting estimate because the evaluation of impairment
and the determination of fair values involve a number of
management assumptions relating to future economic events that
could materially affect the determination of the ultimate value,
and therefore, the carrying amounts of our real estate.
When determining if there is an indication of impairment, we
estimate the assets NOI over the anticipated holding
period on an undiscounted cash flow basis and compare this
amount to its carrying value. Estimating the expected NOI and
holding period requires significant management judgment. If it
is determined that there is an indication of impairment for
assets to be held and used, or if an asset is deemed to be held
for sale, we then determine the assets fair value.
The apartment industry uses capitalization rates as the primary
measure of fair value. Specifically, annual NOI for a community
is divided by an estimated capitalization rate to determine the
fair value of the community. Determining the appropriate
capitalization rate requires significant judgment and is
typically based on many factors including the prevailing rate
for the market or submarket. Further, capitalization rates can
fluctuate up or down due to a variety of factors in the overall
economy or within local markets. If the actual capitalization
rate for a community is significantly different from our
estimated rate, the impairment evaluation for an individual
asset could be materially affected. For example, we would value
a community with annual NOI of $10 million at
$200 million using a 5.0% capitalization rate, whereas that
same community would be valued at $166.7 million if the
actual capitalization rate were 6.0%. Historically we have had
limited and infrequent impairment charges, and the majority of
our apartment community sales have produced gains. For example,
we have sold approximately $6.8 billion of real estate
assets (excluding Ameriton) over the last nine years, which
produced $1.2 billion in gains at an unleveraged internal
rate of return of approximately 13.0%. We evaluate a real estate
asset for potential impairment when events or changes in
circumstances indicate that its carrying amount may not be
recoverable.
42
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Capital Expenditures and Depreciable Lives |
We incur costs relating to redevelopment initiatives, revenue
enhancing and expense reducing capital expenditures, and
recurring capital expenditures that are capitalized as part of
our real estate. These amounts are capitalized and depreciated
over estimated useful lives determined by management. We
allocate the cost of newly acquired properties between net
tangible and identifiable intangible assets. The primary
intangible asset associated with an apartment community
acquisition is the value of the existing lease agreements. When
allocating cost to an acquired property, we first allocate costs
to the estimated intangible value of the existing lease
agreements and then to the estimated value of the land, building
and fixtures assuming the property is vacant. We estimate the
intangible value of the lease agreements by determining the lost
revenue associated with a hypothetical lease-up. We depreciate
the building and fixtures based on the expected useful life of
the asset and amortize the intangible value of the lease
agreements over the average remaining life of the existing
leases.
Determining whether expenditures meet the criteria for
capitalization, the assignment of depreciable lives and
determining the appropriate amounts to allocate between tangible
and intangible assets for property acquisitions requires our
management to exercise significant judgment and is therefore
considered a significant accounting estimate.
Total capital expenditures were 1.0% and 1.4% of weighted
average gross real estate as of December 31, 2004 and 2003,
respectively. Additionally, depreciation expense as a percentage
of depreciable real estate was 3.3%, 3.2% and 3.1% or $0.99,
$1.04 and $1.16 per Unit for the years ended
December 31, 2004, 2003 and 2002, respectively. If the
actual weighted average useful life were determined to be one
year shorter or longer than managements current estimate,
our annual depreciation expense would increase or decrease
approximately 3.3% or $0.03 per Common Unit. See
Note 1 in our audited financial statements in this Annual
Report for additional detail on depreciable lives.
We incur costs relating to the potential acquisition of real
estate which we refer to as pursuit costs. To the extent that
these costs are identifiable with a specific property and would
be capitalized if the property were already acquired, the costs
are accumulated by project and capitalized in the Other Asset
section of the balance sheet. If these conditions are not met,
the costs are expensed as incurred. Capitalized costs include
but are not limited to earnest money, option fees, environmental
reports, traffic reports, surveys, photos, blueprints, direct
and incremental personnel costs and legal costs. Upon
acquisition, the costs are included in the basis of the acquired
property. When it becomes probable that a prospective
acquisition will not be acquired, the accumulated costs for the
property are charged to other expense on the statement of
earnings in the period such a determination is made.
Because of the inherent judgment involved in evaluating whether
a prospective property will ultimately be acquired, we believe
capitalizable pursuit costs are a critical accounting
estimate. If it were determined that a quarter of our
prospective acquisitions were deemed improbable as of
December 31, 2004, net earnings for the year ended
December 31, 2004 would decrease by approximately
$0.016 per Common Unit, excluding refundable earnest money.
Off Balance Sheet Arrangements
Investments in entities that do not qualify as a variable
interest entity and are not controlled through majority economic
interest are not consolidated and are reported as investments in
unconsolidated entities. Our investments in unconsolidated
entities at December 31, 2004, consisted of
$111.5 million in real estate joint ventures, which
generally consist of our percentage ownership in the equity of
the joint ventures.
Consolidated Engineering Services is a service business that we
acquired in the Smith Merger in 2001, and prior to its sale had
been reported as an unconsolidated entity in our financial
statements. CES provides engineering services for commercial and
residential real estate across the country. On December 19,
2002, CES was sold to a third party for $178 million in
cash. We recorded a $35.4 million net gain on the sale of
the
43
business or $0.16 per share on a fully diluted basis. As a
condition of sale, we agreed to indemnify the buyer for certain
representations and warranties contained in the sale contract.
During 2004 we recognized $3.2 million of additional income
associated with the expiration of these contingencies.
Additionally, approximately $6.7 million in contingent
proceeds related to indemnification of accounts receivable over
120 days were excluded from the initial gain. We recognized
$0.9 million and $5.3 million of these contingent
proceeds during 2004 and 2003, respectively. We also recognized
$3.1 million related to settlement of an ongoing CES
lawsuit during 2004.
Smith Management Construction, Inc. (SMC) is a service
business that we acquired in the Smith Merger during 2001. We
sold SMC during February 2003 to members of SMCs senior
management. Prior to the sale, we reported SMC as an
unconsolidated entity in our financial statements. We received
two notes receivable totaling $5.8 million and bearing an
interest rate of 7.0% as consideration for the sale. The first
note for $3.5 million has principal payments that began in
October 2003 with payment in full by February 2008. As of
December 31, 2004, the outstanding balance on this note
receivable was $3.1 million. The second note for
$2.3 million was fully repaid along with all accrued
interest due during May 2003. During the second quarter of 2004,
we recognized the divestiture since our responsibilities under
the majority of the outstanding performance guarantees, which
pertain to ongoing construction projects at the time of sale,
expired.
As part of the Smith Merger, we are required to indemnify the
former Smith Partnership unitholders for any personal income tax
expense resulting from the sale of high-rise properties
identified in the shareholders agreement between
Archstone-Smith, the Operating Trust, Robert H. Smith and Robert
P. Kogod until October 31, 2021.
Contractual Commitments
The following table summarizes information contained in
Managements Discussion and Analysis of Financial Condition
and Results of Operations and in our audited financial
statements in this Annual Report regarding contractual
commitments (amounts in millions):
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2006 and | |
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2008 and | |
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2010 thru | |
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2005 | |
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2007 | |
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2009 | |
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2096 | |
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Total | |
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Scheduled long-term debt maturities
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$ |
313.7 |
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$ |
838.0 |
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$ |
911.2 |
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$ |
2,067.7 |
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$ |
4,130.6 |
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Unsecured credit facilities(1)
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19.0 |
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19.0 |
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Interest on indebtedness
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238.6 |
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413.4 |
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311.3 |
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275.9 |
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1,239.2 |
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Development and redevelopment expenditures
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380.2 |
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105.7 |
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485.9 |
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Performance bond guarantees(2)
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18.9 |
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0.7 |
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2.4 |
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22.0 |
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Lease commitments and other(3)
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34.0 |
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18.5 |
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13.3 |
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347.2 |
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413.0 |
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Total
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$ |
985.4 |
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$ |
1,395.3 |
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$ |
1,235.8 |
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$ |
2,693.2 |
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$ |
6,309.7 |
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(1) |
The $600 million unsecured facility matures December 2007,
with a one-year extension option available at our discretion. |
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(2) |
The Operating Trust, our subsidiaries and investees have not
been required to perform on these guarantees, nor do we
anticipate being required to perform on such guarantees. Since
we believe that our risk of loss under these contingencies is
remote, no accrual for potential loss has been made in the
accompanying financial statements. We are still obligated for
certain performance bond guarantees for SMC subsequent to their
sale, but there are recourse provisions available to us to
recover any potential future payments from the new owners of SMC. |
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(3) |
Lease commitments relate principally to ground lease payments as
of December 31, 2004. |
44
Related Party Transactions
Ameriton paid approximately $3.2 million and
$1.5 million to certain officers and employees of the
Operating Trust related to realized returns on investments sold
during 2004 and 2003, respectively, none of which were made to
members of Ameritons board. Four members of
Ameritons board (James H. Polk, III, John C. Schweitzer,
R. Scot Sellers and Charles E. Mueller, Jr.) are Trustees
of Archstone-Smith or executive officers of the Operating Trust.
During 1997, as part of the employee share purchase plan,
certain officers and other employees purchased Common Shares of
Archstone-Smith. Archstone-Smith financed 95% of the total
purchase price by issuing notes representing approximately
$17.1 million. As of December 31, 2004, the aggregate
outstanding balances on these notes were approximately $917,000.
ArchstoneSmith has the following business relationships with
business entities or family members of Board of Trustee member
Robert H. Smith:
Mr. Smith owns a residence within a condominium in Crystal
City, where Archstone-Smith staffs the property with doormen,
maintenance, and administrative staff. Archstone-Smith is
contractually reimbursed by the condominium association for
payroll and benefits costs, and receives a contractual monthly
management fee of $848 for other Archstone-Smith management
oversight. ASN does not have an ownership interest in this
property. Archstone-Smith billed $175,368 during 2004 for
expenses incurred and management fees for this property.
Mr. Smith and Mr. Kogod have a 0.33% and 4.36%
ownership interest, respectively, in a partnership which owns
two apartment communities in Washington D.C. Archstone-Smith
receives a contractual management fee of 4.5% of revenues to
employ the property maintenance and administrative staff, manage
the property, and perform all accounting functions.
Archstone-Smith does not have an ownership interest in this
property. We billed $941,301 during the twelve months ended
December 31, 2004, for expenses incurred and management
fees for this property.
Mr. Smiths daughter is employed as a Vice President
in Marketing at a salary and bonus of approximately $109,000 and
received option grants with a face value of $237,000 as
compensation during 2004. She has been employed by the Company
and its predecessor Charles E. Smith Residential Realty since
September 1980.
New Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 151,
Inventory Costs an amendment of ARB No. 43,
Chapter 4. This Statement is effective for the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material associated with
inventory costs incurred during fiscal years beginning after
June 15, 2005. The Statement requires that the
above-mentioned items be recognized as current-period charges.
We do not believe that the adoption of SFAS No. 151
will have a material impact on our financial position, net
earnings or cash flows.
In December 2004, the FASB issued SFAS No. 152,
Accounting for Real Estate Time-Sharing Transactions an
amendment of FASB Statements No. 66 and 67. This
Statement amends SFAS No. 66, Accounting for
Sales of Real Estate to reference the financial
accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate
Time-Sharing Transactions. This Statement also amends
SFAS No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects to specify
that guidance relating to (a) incidental operations
(b) costs incurred to sell real estate projects does not
apply to real estate time-sharing transactions. This Statement
is effective for fiscal years beginning after June 15,
2005. We do not believe that the adoption of
SFAS No. 152 will have a material impact on our
financial position, net earnings or cash flows.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Non-monetary Assets an amendment of APB
No. 29. This Statement amends APB Opinion
No. 29, Accounting for Non-monetary
Transactions to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces
45
it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. That exception required
that some non-monetary exchanges be recorded on a carryover
basis versus this Statement, which requires that an entity
record a non-monetary exchange at fair value and recognize any
gain or loss if the transaction has commercial substance. This
Statement is effective for fiscal years beginning after
June 15, 2005. We do not believe that the adoption of
SFAS No. 153 will have a material impact on our
financial position, net earnings or cash flows.
In December 2004, the FASB issued SFAS No. 123 revised
2004, Share-Based Payment. This Statement is
a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supercedes APB
No. 25, Accounting for Stock Issued to
Employees. The Statement requires companies to
recognize in the income statement the grant-date fair value of
stock options and other equity based compensation issued to
employees. This Statement is effective as of the beginning of
the first interim or annual period that commences after
June 15, 2005. We do not believe that the adoption of
SFAS No. 123 revised 2004 will have a material impact
on our financial position, net earnings or cash flows.
In March 2004, the FASB issued EITF Issue No. 03-6,
Participating Securities and the Two
Class Method under FASB Statement No. 128, Earnings
per Share (EITF No. 03-6). This issue address
whether the two-class method requires the presentation of basic
and diluted EPS for all participating securities and how a
participating security should be defined. The guidance to this
issue should be applied to reporting periods beginning after
March 31, 2004. Prior period earnings per share amounts
presented for comparative purposes should be restated to conform
to the guidance in this consensus. The adoption of EITF
No. 03-6 had no impact on our financial position, net
earnings or cash flows.
In October 2004, the FASB issued EITF Issue No. 04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share (EITF No. 04-8). This Issue
addresses when contingently convertible instruments should be
included in diluted earnings per share and should be applied for
reporting periods ending after December 15, 2004. The
adoption of EITF No. 04-8 had no impact on our financial
position, net earnings or cash flows.
In November 2004, the FASB issued EITF Issue No. 03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, in Determining Whether to Report Discontinued
Operations (EITF No. 03-13). This issue assists
in the development of a model for evaluating (a) which cash
flows are to be considered in determining whether cash flows
have been or will be eliminated and (b) what types of
continuing involvement constitute significant continuing
involvement. The guidance in this issue should be applied to a
component of an enterprise that is either disposed of or
classified as held for sale in fiscal periods beginning after
December 15, 2004. Previously reported operating results
related to disposal transactions initiated within an
enterprises fiscal year that includes the date that this
consensus was ratified (November 30, 2004) may be
reclassified. The adoption of EITF No. 03-13 had no impact
on our financial position, net earnings or cash flows.
In September 2004, the FASB issued EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (EITF
No. 03-1). The guidance in EITF No. 03-1 was effective
for other-than-temporary impairment evaluations made in
reporting periods beginning after June 15, 2004. However,
certain provisions regarding the assessment of whether an
impairment is other than temporary have been delayed. Although
the disclosure requirements continue to be effective in annual
financial statements for fiscal years ending after
December 15, 2003, for investments accounted for under
SFAS No. 115 and 124. For all other investments
addressed by EITF No. 03-1, the disclosures continue to be
effective in annual financial statements for fiscal years ending
after June 15, 2004. The adoption of EITF No. 03-1 had
no impact on our financial position, net earnings or cash flows.
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Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We have both public and private investments in equity
securities. The publicly traded equity securities are classified
as available for sale securities and carried at fair
value, with unrealized gains and losses
46
reported as a separate component of unitholders equity.
The private investments, for which we lack the ability to
exercise significant influence, are accounted for at cost.
Declines in the value of public and private investments that our
management determines are other than temporary, are recorded as
a provision for possible loss on investments. Our evaluation of
the carrying value of these investments is primarily based upon
a regular review of market valuations (if available), each
companys operating performance and assumptions underlying
cash flow forecasts. In addition, our management considers
events and circumstances that may signal the impairment of an
investment.
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Interest Rate Hedging Activities |
We are exposed to the impact of interest rate changes and will
occasionally utilize interest rate swaps and interest rate caps
as hedges with the objective of lowering our overall borrowing
costs. These derivatives are designated as either cash flow or
fair value hedges. We do not use these derivatives for trading
or other speculative purposes. Further, as a matter of policy,
we only enter into contracts with major financial institutions
based upon their credit ratings and other factors. When viewed
in conjunction with the underlying and offsetting exposure that
the derivatives are designed to hedge, we have not, nor do we
expect to sustain a material loss from the use of these hedging
instruments.
We formally assess, both at inception of the hedge and on an
ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged
item. We measure hedge effectiveness by comparing the changes in
the fair value or cash flows of the derivative instrument with
the changes in the fair value or cash flows of the hedged item.
We assess effectiveness of purchased interest rate caps based on
overall changes in the fair value of the caps. If a derivative
ceases to be a highly effective hedge, we discontinue hedge
accounting prospectively.
To determine the fair values of derivative and other financial
instruments, we use a variety of methods and assumptions that
are based on market value conditions and risks existing at each
balance sheet date. These methods and assumptions include
standard market conventions and techniques such as discounted
cash flow analysis, option pricing models, replacement cost and
termination cost. All methods of assessing fair value result in
a general approximation of value, and therefore, are not
necessarily indicative of the actual amounts that we could
realize upon disposition.
During the years ended December 31, 2004, 2003 and 2002 we
recorded an increase/(decrease) to interest expense of $33,000,
$101,000 and $(312,000), for hedge ineffectiveness caused by a
difference between the interest rate index on a portion of our
outstanding variable rate debt and the underlying index of the
associated interest rate swap. We pursue hedging strategies that
we expect will result in the lowest overall borrowing costs and
least degree of earnings volatility possible under the new
accounting standards.
47
The following table summarizes the notional amount, carrying
value and estimated fair value of our derivative financial
instruments used to hedge interest rates, as of
December 31, 2004 (dollar amounts in thousands). The
notional amount represents the aggregate amount of a particular
security that is currently hedged at one time, but does not
represent exposure to credit, interest rate or market risks.
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|
|
|
|
|
Carrying and | |
|
|
Notional | |
|
Maturity | |
|
Estimated Fair | |
|
|
Amount | |
|
Date Range | |
|
Value | |
|
|
| |
|
| |
|
| |
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$ |
109,008 |
|
|
|
2005-2007 |
|
|
$ |
8 |
|
|
Interest rate swaps
|
|
|
150,000 |
|
|
|
2006 |
|
|
|
(3,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
$ |
259,008 |
|
|
|
2005-2007 |
|
|
$ |
(3,548 |
) |
|
|
|
|
|
|
|
|
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$ |
75,055 |
|
|
|
2008 |
|
|
$ |
4,470 |
|
|
Total rate of return swaps
|
|
|
77,006 |
|
|
|
2006-2007 |
|
|
|
8,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges
|
|
$ |
152,061 |
|
|
|
2005-2008 |
|
|
$ |
13,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedges
|
|
$ |
411,069 |
|
|
|
2005-2008 |
|
|
$ |
9,515 |
|
|
|
|
|
|
|
|
|
|
|
During 2004, we entered into interest rate swap transactions to
mitigate the risk of changes in the interest-related cash
outflows on a forecasted issuance of long-term unsecured debt.
At inception, these swap transactions had an aggregate notional
amount of $144 million and a fair value of zero. The
long-term unsecured debt these swap transactions related to was
issued in August 2004. The hedge was terminated when the debt
was issued. The fair value of the cash flow hedge upon
termination was a liability of approximately $2.5 million.
This amount was deferred in accumulated other comprehensive
income and will be reclassified out of accumulated other
comprehensive income as additional interest expense as the
hedged forecasted interest payments occur.
|
|
|
Equity Securities Hedging Activities |
We are exposed to price risk associated with changes in the fair
value of certain equity securities. During 2003, we entered into
forward sale agreements with an aggregate notional amount, which
represents the fair value of the underlying marketable
securities, of approximately $128.5 million and an
aggregate fair value of the forward sale agreements of
approximately $486,000, to protect against a reduction in the
fair value of these securities. We designated this forward sale
as a fair value hedge.
During 2004, we settled all of the forward sales agreements for
approximately 2.8 million shares, and sold
308,200 shares of marketable securities which were not
subject to forward sales agreements, resulting in an aggregate
gain of approximately $24.9 million. The total net proceeds
from the sale were $143.0 million, with the marketable
securities basis determined using the average costs of the
securities. The fair value of forward sales agreements at
December 31, 2004 and 2003 were $0 and $250,462,
respectively.
48
|
|
|
Interest Rate Sensitive Liabilities |
The table below provides information about our liabilities that
are sensitive to changes in interest rates as of
December 31, 2004. As the table incorporates only those
exposures that existed as of December 31, 2004, it does not
consider those exposures or positions, which could arise after
that date.
Moreover, because there were no firm commitments to actually
sell these instruments at fair value as of December 31,
2004, the information presented herein is an estimate and has
limited predictive value. As a result, our ultimate realized
gain or loss, if any, will depend on the exposures that arise
during future periods, hedging strategies, prevailing interest
rates and other market factors existing at the time. The debt
classification and interest rates shown below give effect to
fair value hedges and other fees or expenses, where applicable
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Fair | |
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Balance | |
|
Value(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest rate sensitive liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured credit facilities:
|
|
$ |
19,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19,000 |
|
|
$ |
19,000 |
|
|
|
Average nominal interest rate(2)
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6 |
% |
|
|
|
|
|
Long-Term Unsecured Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$ |
251,250 |
|
|
$ |
51,250 |
|
|
$ |
386,250 |
|
|
$ |
311,250 |
|
|
$ |
82,277 |
|
|
$ |
937,330 |
|
|
$ |
2,019,607 |
|
|
$ |
2,183,254 |
|
|
|
|
Average nominal interest rate(2)
|
|
|
8.2 |
% |
|
|
7.4 |
% |
|
|
5.4 |
% |
|
|
4.0 |
% |
|
|
7.6 |
% |
|
|
6.9 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
Variable rate(3)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,412 |
|
|
$ |
|
|
|
$ |
57,113 |
|
|
$ |
79,525 |
|
|
$ |
79,525 |
|
|
|
|
Average nominal interest rate(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1 |
% |
|
|
|
|
|
|
2.1 |
% |
|
|
2.1 |
% |
|
|
|
|
|
Mortgages payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
$ |
18,051 |
|
|
$ |
240,330 |
|
|
$ |
122,216 |
|
|
$ |
119,409 |
|
|
$ |
368,512 |
|
|
$ |
591,490 |
|
|
$ |
1,460,008 |
|
|
$ |
1,521,939 |
|
|
|
|
Average nominal interest rate(2)
|
|
|
6.1 |
% |
|
|
6.0 |
% |
|
|
5.6 |
% |
|
|
6.2 |
% |
|
|
6.8 |
% |
|
|
6.6 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
Variable rate debt
|
|
$ |
44,442 |
|
|
$ |
3,873 |
|
|
$ |
34,056 |
|
|
$ |
3,541 |
|
|
$ |
3,830 |
|
|
$ |
481,755 |
|
|
$ |
571,497 |
|
|
$ |
571,497 |
|
|
|
|
Average nominal interest rate(2)
|
|
|
4.2 |
% |
|
|
2.0 |
% |
|
|
2.7 |
% |
|
|
2.0 |
% |
|
|
1.9 |
% |
|
|
2.0 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
(1) |
The estimated fair value for each of the liabilities listed was
calculated by discounting the actual principal payment stream at
prevailing interest rates (obtained from third party financial
institutions) currently available on debt instruments with
similar terms and features. |
|
(2) |
Reflects the weighted average nominal interest rate on the
liabilities outstanding during each period, giving effect to
principal payments and final maturities during each period, if
any. The nominal rates for variable rate mortgages payable have
been held constant during each period presented based on the
actual variable rates as of December 31, 2004. The weighted
average effective interest rate on the unsecured credit
facilities, Long- Term Unsecured Debt and mortgages payable was
2.62%, 6.23% and 5.24%, respectively, as of December 31,
2004. |
|
(3) |
Represents unsecured tax-exempt bonds. |
|
|
Item 8. |
Financial Statements and Supplementary Data |
Our Balance Sheets as of December 31, 2004 and 2003, and
our Statements of Earnings, Unitholders Equity, Other
Common Unitholders Interest and Comprehensive Income and
Cash Flows for each of the years in the three-year period ended
December 31, 2004, Schedule III Real
Estate and Accumulated Depreciation and
Schedule IV Mortgage Loans on Real Estate,
together with the reports of KPMG LLP, registered public
accounting firm, are included under Item 15 of this Annual
Report and are incorporated herein by reference. Selected
quarterly financial data is presented in Note 10 of our
audited financial statements in this Annual Report.
49
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
Item 9A. |
Controls and Procedures |
An evaluation was carried out under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934).
Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls
and procedures were, to the best of their knowledge, effective
as of December 31, 2004, to ensure that information
required to be disclosed in reports that are filed or submitted
under the Securities Exchange Act are recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent
to December 31, 2004, there were no significant changes in
the Operating Trusts disclosure controls or in other
factors that could significantly affect these controls,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|
|
|
Managements Report on Internal Control Over
Financial Reporting |
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended). Our management assessed the effectiveness of
our internal control over financial reporting as of
December 31, 2004. In making this assessment, our
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Our
management has concluded that, as of December 31, 2004, our
internal control over financial reporting was effective based on
these criteria. Our independent registered public accounting
firm, KPMG LLP, has issued an audit report on our assessment of
our internal control over financial reporting, which is included
herein.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
and procedures or our internal controls will prevent all error
and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
their inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within Archstone-Smith
Operating Trust have been detected.
50
PART III
|
|
Item 10. |
Trustees and Executive Officers of the Registrant |
Archstone-Smith is our sole trustee and is responsible for the
oversight and management of the Operating Trust. All of the
property ownership and business operations of Archstone-Smith
are conducted through the Operating Trust. For information
regarding our senior officers, see Item 1.
Business Officers of the Operating Trust. For
information regarding our Code of Ethics, see Item 1.
Business Available Information and Code of
Ethics. Information regarding the trustees of
Archstone-Smith will be contained in Archstone-Smiths
definitive proxy statement relating to the 2005 Annual Meeting
of Shareholders to be held
on ,
2005 (the Archstone-Smith Proxy Statement), which is
incorporated herein by reference. Please see the Archstone-Smith
Proxy Statement for further information.
Section 16(a) of the Securities Exchange Act of 1934
requires the Operating Trust to report whether or not, based on
its review of reports to the SEC filed by beneficial owners of
more than 10% of any class of equity securities registered under
Section 12 of the Securities Act of 1933 any such required
reports were not filed or were filed untimely.
|
|
Item 11. |
Executive Compensation |
Our sole trustee is responsible for the oversight and management
of the Operating Trust and performs the day-to-day management of
the Operating Trust through its officers. No compensation is
paid to Archstone-Smith for acting as trustee. Each officer of
our sole trustee holds the same officer position with the
Operating Trust and is compensated for his or her service to
Archstone-Smith and the Operating Trust, considered as a single
enterprise. Information concerning the compensation of the
executive officers of Archstone-Smith will be contained in the
Archstone-Smith Proxy Statement, which is incorporated herein by
reference. Please see the Archstone-Smith Proxy Statement for
further information.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
Archstone-Smith owns all of the outstanding voting securities of
the Operating Trust. The following table sets forth information
as of February 13, 2004, regarding beneficial ownership of
A-1 Common Units by each person known by us to be beneficial
owners of more than 5% of the A-1 Common Units, by each of
Archstone-Smiths trustees, by each of
Archstone-Smiths five most highly compensated executive
officers and by all of Archstone-Smiths trustees and
executive officers as a group. Each person named in the table
has sole voting and investment power with respect to all A-1
Common Units shown as beneficially owned by such person, except
as otherwise set forth in the notes to the table. The address of
each person listed below is c/o Archstone-Smith Trust,
9200 E. Panorama Circle, Suite 400, Englewood,
Colorado 80112.
|
|
|
|
|
|
|
|
|
|
|
Number of A-1 | |
|
|
|
|
Common Units | |
|
Percentage of All | |
Name of Beneficial Owner |
|
Beneficially Owned | |
|
A-1 Common Units | |
|
|
| |
|
| |
Robert P. Kogod
|
|
|
2,522,094 |
(1) |
|
|
10.9 |
% |
R. Scot Sellers
|
|
|
|
|
|
|
|
|
Robert H. Smith
|
|
|
2,607,801 |
(1) |
|
|
11.3 |
% |
J. Lindsay Freeman
|
|
|
|
|
|
|
|
|
Dana K. Hamilton
|
|
|
|
|
|
|
|
|
Charles E. Mueller, Jr.
|
|
|
|
|
|
|
|
|
James D. Rosenberg
|
|
|
|
|
|
|
|
|
All Operating Trust trustees and executive officers as a group
(7 persons)(2)
|
|
|
2,800,127 |
(1) |
|
|
12.4 |
% |
|
|
(1) |
Includes for each of Messrs. Smith and Kogod beneficial
ownership of Common Shares which are issuable upon conversion of
Class A-1 Common Units as follows: Mr. Smith,
2,418,655 and Mr. Kogod, 2,398,510. Mr. Smith has
shared voting and shared dispositive power with respect to
2,418,655 of such |
51
|
|
|
Class A-1 Common Units. Of the 2,418,655 Class A-1
Common Units for which Mr. Smith shares voting power and
dispositive power, 88,887 are owned by Mr. Smiths
spouse and 2,329,768 are owned by CESM, Inc., of which
Mr. Smith is a director and the vice president, secretary
and treasurer. Mr. Kogod has shared voting and shared
dispositive power with respect to 2,398,510 of such
Class A-1 Common Units. Of the 2,398,510 Class A-1
Common Units for which Mr. Kogod shares voting power and
dispositive power, 68,742 are owned by Mr. Kogods
spouse and 2,329,768 are owned by Charles E. Smith
Management, Inc., of which Mr. Kogod is a director and the
president. The Class A-1 Common Units that are owned by
CESM, Inc. are reported twice, once as beneficially owned by
Mr. Smith and again as beneficially owned by
Mr. Kogod, but are only counted once in the calculation of
beneficial ownership of our Trustees and executive officers as a
group. |
|
(2) |
Archstone-Smith is the sole trustee of the Operating Trust and
owned 89.1% of the Operating Trust via A-2 Common Units as
of December 31, 2004. |
|
|
Item 13. |
Certain Relationships and Related Transactions |
All of the property ownership and business operations of
Archstone-Smith are conducted through the Operating Trust. In
the normal course of business, because of our structure as an
UPREIT, Archstone-Smith conducts all of its operations through
the Operating Partnership and, as a result, engages in a
significant number of transactions with and on behalf of the
Operating Trust. Information concerning certain relationships
and related transactions between the Operating Trust and its
trustees, executive officers, holders of more than 10% of its
Common Shares and related persons, will be contained in the
Archstone-Smith Proxy Statement, which is incorporated herein by
reference. Please see the Archstone-Smith Proxy Statement for
further information.
|
|
Item 14. |
Principal Accounting Fees and Services |
PROPOSAL 3 RATIFICATION OF RELATIONSHIP WITH
PUBLIC ACCOUNTANTS
Subject to shareholder ratification, the Audit Committee has
selected KPMG LLP, certified public accountants, to serve as the
auditors of the Operating Trusts books and records for the
coming year. KPMG LLP has served as our auditors since
1980. A representative of KPMG LLP is expected to be
present at the annual meeting, and will be given an opportunity
to make a statement if that representative desires to do so and
will be available to respond to appropriate questions.
The fees billed by KPMG LLP in 2003 and 2004 for services
provided to the Operating Trust were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Audit Fees(1)
|
|
$ |
1,597,000 |
|
|
$ |
888,750 |
|
Audit-Related Fees(2)
|
|
|
202,500 |
|
|
|
186,800 |
|
Tax Fees(3)
|
|
|
219,650 |
|
|
|
281,949 |
|
All Other Fees(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
2,019,150 |
|
|
$ |
1,357,499 |
|
|
|
|
|
|
|
|
|
|
(1) |
Audit Fees are the aggregate fees billed by KPMG LLP
for professional services rendered for the audit of the
Operating Trusts annual financial statements for the years
ended December 31, 2004 and December 31, 2003 and the
reviews of the financial statements included in the Operating
Trusts quarterly reports on Form 10-Q during 2004 and
2003. Audit Fees also includes amounts billed for
registration statements filed in 2003 and 2004 and related
comfort letters and consent. These fees include fees billed in
connection with KPMG LLPs analysis of the effectiveness of
our internal controls. |
52
|
|
(2) |
Audit-related fees include fees billed for assurance
and related services that are reasonably related to the
performance of the audit and not included in the audit
fees described above, including audits of joint ventures
and unconsolidated and consolidated subsidiaries. |
|
(3) |
Tax Fees are fees billed by KPMG LLP in either
2004 or 2003 for tax services, including tax compliance, tax
advice or tax planning. |
|
(4) |
All Other Fees are fees billed by KPMG LLP in
2004 or 2003 that are not included in the above classifications. |
Pre-Approval Process
All services provided by KPMG LLP in 2004 were, and all
services to be provided by KPMG LLP in 2005 will be,
permissible under applicable laws and regulations and have been,
and will continue to be, pre-approved by the Audit Committee. In
accordance with applicable law, the Operating Trust is required
to disclose the non-audit services approved by the Audit
Committee performed by KPMG LLP. Non-audit services are
defined as services other than those provided in connection with
an audit or a review of the financial statements of a company.
The Audit Committee approved the engagement of KPMG LLP for
non-audit services, consisting of certain specified tax-related
services during 2004 and 2005, provided that the fees for tax
compliance services did not exceed $200,000 and non-compliance
tax services did not exceed $400,000 in the aggregate or
$100,000 for any one service.
53
PART IV
|
|
Item 15. |
Exhibits, Financial Statement Schedules |
The following documents are filed as part of this report:
|
|
|
(a) Financial Statements and Schedule: |
1. Financial Statements
|
|
|
See Index to Financial Statements and Schedule on page 55
of this report, which is incorporated herein by reference. |
2. Financial Statement Schedule:
|
|
|
See Schedule III on page 97 of this report, which is
incorporated herein by reference. |
|
|
See Schedule IV on page 99 of this report, which is
incorporated herein by reference. |
|
|
All other schedules have been omitted since the required
information is presented in the financial statements and the
related notes or is not applicable. |
3. Exhibits
|
|
|
See Index to Exhibits on page 101 of this report, which is
incorporated herein by reference. |
(b) Exhibits:
|
|
|
The Exhibits required by Item 601 of Registration S-K
are listed in the Index to Exhibits on page 101 of this
Annual Report, which is incorporated herein by reference. |
54
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
56 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
|
|
|
62 |
|
|
|
|
96 |
|
|
|
|
97 |
|
|
|
|
99 |
|
|
|
|
100 |
|
|
|
|
101 |
|
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Trustee and Unitholders
Archstone-Smith Operating Trust:
We have audited the accompanying consolidated balance sheets of
Archstone-Smith Operating Trust and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated
statements of earnings, unitholders equity, other common
unitholders interest and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements
are the responsibility of Archstone-Smith Operating Trusts
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Archstone-Smith Operating Trust and subsidiaries as
of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
Effective July 1, 2003, Archstone-Smith Operating Trust
adopted FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (revised). As a result, the
accompanying consolidated financial statements, referred to
above, have been restated to reflect the consolidated financial
position and results of operations of Archstone-Smith Operating
Trust and certain previously unconsolidated entities in
accordance with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Archstone-Smith Operating Trusts internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 28, 2005, expressed an unqualified
opinion on managements assessment of, and the effective
operation of, internal control over financial reporting.
Denver, Colorado
February 28, 2005
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Trustee and Unitholders
Archstone-Smith Operating Trust:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting appearing under Item 9A, that
Archstone-Smith Operating Trust maintained effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).Archstone
Smith Operating Trusts management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of Archstone-Smith Operating Trusts internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that
Archstone-Smith Operating Trust maintained effective internal
control over financial reporting as of December 31, 2004,
is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion,
Archstone-Smith Operating Trust maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2004, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Archstone-Smith Operating Trust
and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of earnings, unitholders
equity, other common unitholders interest and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2004, and
our report dated February 28, 2005, expressed an
unqualified opinion on those consolidated financial
statements.
Denver, Colorado
February 28, 2005
57
ARCHSTONE-SMITH OPERATING TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
Real estate
|
|
$ |
8,958,195 |
|
|
$ |
8,783,349 |
|
Real estate held for sale
|
|
|
262,843 |
|
|
|
215,831 |
|
Less accumulated depreciation
|
|
|
763,542 |
|
|
|
648,982 |
|
|
|
|
|
|
|
|
|
|
|
8,457,496 |
|
|
|
8,350,198 |
|
Investments in and advances to unconsolidated entities
|
|
|
111,481 |
|
|
|
86,367 |
|
|
|
|
|
|
|
|
|
|
Net investments
|
|
|
8,568,977 |
|
|
|
8,436,565 |
|
Cash and cash equivalents
|
|
|
203,255 |
|
|
|
5,230 |
|
Restricted cash in tax-deferred exchange escrow
|
|
|
120,095 |
|
|
|
180,920 |
|
Other assets
|
|
|
173,717 |
|
|
|
298,980 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
9,066,044 |
|
|
$ |
8,921,695 |
|
|
|
|
|
|
|
|
LIABILITIES AND UNITHOLDERS EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Unsecured credit facilities
|
|
$ |
19,000 |
|
|
$ |
103,790 |
|
|
Long-Term Unsecured Debt
|
|
|
2,099,132 |
|
|
|
1,871,965 |
|
|
Mortgages payable
|
|
|
1,970,889 |
|
|
|
1,866,252 |
|
|
Mortgages payable held for sale
|
|
|
60,616 |
|
|
|
61,373 |
|
|
Accounts payable
|
|
|
52,052 |
|
|
|
27,086 |
|
|
Accrued expenses and other liabilities
|
|
|
273,079 |
|
|
|
254,126 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,474,768 |
|
|
|
4,184,592 |
|
|
|
|
|
|
|
|
Minority interest
|
|
|
2,050 |
|
|
|
11,510 |
|
|
|
|
|
|
|
|
Other common unitholders interest, at redemption value
(A-1 Common Units: 23,117,498 in 2004 and 25,301,069 in 2003)
|
|
|
885,400 |
|
|
|
707,924 |
|
|
|
|
|
|
|
|
Unitholders equity:
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Units
|
|
|
|
|
|
|
50,000 |
|
|
Perpetual Preferred Units
|
|
|
69,522 |
|
|
|
160,120 |
|
|
Common unitholders equity (A-2 Common Units:
199,577,459 units in 2004 and 194,762,263 units in
2003)
|
|
|
3,638,729 |
|
|
|
3,793,314 |
|
|
Accumulated other comprehensive earnings (loss)
|
|
|
(4,425 |
) |
|
|
14,235 |
|
|
|
|
|
|
|
|
|
|
Total unitholders equity
|
|
|
3,703,826 |
|
|
|
4,017,669 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and unitholders equity
|
|
$ |
9,066,044 |
|
|
$ |
8,921,695 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
ARCHSTONE-SMITH OPERATING TRUST
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$ |
854,121 |
|
|
$ |
764,338 |
|
|
$ |
744,877 |
|
|
Other income
|
|
|
19,208 |
|
|
|
19,334 |
|
|
|
9,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
873,329 |
|
|
|
783,672 |
|
|
|
754,339 |
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses
|
|
|
219,717 |
|
|
|
189,691 |
|
|
|
189,099 |
|
|
Real estate taxes
|
|
|
81,932 |
|
|
|
67,738 |
|
|
|
66,443 |
|
|
Depreciation on real estate investments
|
|
|
203,183 |
|
|
|
162,723 |
|
|
|
148,588 |
|
|
Interest expense
|
|
|
175,249 |
|
|
|
160,871 |
|
|
|
149,538 |
|
|
General and administrative expenses
|
|
|
55,479 |
|
|
|
49,838 |
|
|
|
45,710 |
|
|
Other expenses
|
|
|
5,972 |
|
|
|
35,879 |
|
|
|
17,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741,532 |
|
|
|
666,740 |
|
|
|
616,392 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
131,797 |
|
|
|
116,932 |
|
|
|
137,947 |
|
|
Minority interest
|
|
|
460 |
|
|
|
|
|
|
|
(5,215 |
) |
|
Gains on dispositions of depreciated real estate, net
|
|
|
|
|
|
|
|
|
|
|
35,950 |
|
|
Income from unconsolidated entities
|
|
|
17,902 |
|
|
|
5,745 |
|
|
|
53,602 |
|
|
Other non-operating income
|
|
|
28,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings before discontinued operations
|
|
|
178,321 |
|
|
|
122,677 |
|
|
|
222,284 |
|
|
Net earnings from discontinued operations
|
|
|
434,302 |
|
|
|
371,514 |
|
|
|
134,441 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
612,623 |
|
|
|
494,191 |
|
|
|
356,725 |
|
|
Preferred Unit Distributions
|
|
|
(16,254 |
) |
|
|
(26,153 |
) |
|
|
(34,309 |
) |
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Common Units Basic
|
|
$ |
596,369 |
|
|
$ |
468,038 |
|
|
$ |
322,416 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Units outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
220,053 |
|
|
|
212,288 |
|
|
|
202,781 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
223,187 |
|
|
|
220,758 |
|
|
|
203,804 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per Common Unit Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings before discontinued operations
|
|
$ |
0.74 |
|
|
$ |
0.45 |
|
|
$ |
0.93 |
|
|
Discontinued operations, net
|
|
|
1.97 |
|
|
|
1.75 |
|
|
|
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
2.71 |
|
|
$ |
2.20 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per Common Unit Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings before discontinued operations
|
|
$ |
0.73 |
|
|
$ |
0.44 |
|
|
$ |
0.92 |
|
|
Discontinued operations, net
|
|
|
1.96 |
|
|
|
1.74 |
|
|
|
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
2.69 |
|
|
$ |
2.18 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
Distributions paid per Common Unit
|
|
$ |
2.72 |
|
|
$ |
1.71 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
ARCHSTONE-SMITH OPERATING TRUST
CONSOLIDATED STATEMENTS OF UNITHOLDERS EQUITY, OTHER
COMMON
UNITHOLDERS INTEREST AND COMPREHENSIVE INCOME
Years Ended December 31, 2004, 2003 and 2002
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible | |
|
Perpetual | |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred | |
|
Preferred | |
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Units at | |
|
Units at | |
|
|
|
Other | |
|
|
|
Other | |
|
|
|
|
Aggregate | |
|
Aggregate | |
|
Common | |
|
Comprehensive | |
|
Total | |
|
Common | |
|
|
|
|
Liquidation | |
|
Liquidation | |
|
Unitholders | |
|
Earnings | |
|
Unitholders | |
|
Unitholders | |
|
|
|
|
Preference | |
|
Preference | |
|
Equity | |
|
(Loss) | |
|
Equity | |
|
Interest | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at December 31, 2002
|
|
$ |
225,351 |
|
|
$ |
148,763 |
|
|
$ |
3,263,035 |
|
|
$ |
(5,517 |
) |
|
$ |
3,631,632 |
|
|
$ |
669,388 |
|
|
$ |
4,301,020 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
314,815 |
|
|
|
|
|
|
|
314,815 |
|
|
|
41,910 |
|
|
|
356,725 |
|
|
|
Change in fair value of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,554 |
) |
|
|
(7,554 |
) |
|
|
|
|
|
|
(7,554 |
) |
|
|
Change in fair value of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732 |
|
|
|
732 |
|
|
|
|
|
|
|
732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Unit distribution
|
|
|
|
|
|
|
|
|
|
|
(34,309 |
) |
|
|
|
|
|
|
(34,309 |
) |
|
|
|
|
|
|
(34,309 |
) |
|
UPREIT Preferred Unit distribution
|
|
|
|
|
|
|
|
|
|
|
1,839 |
|
|
|
|
|
|
|
1,839 |
|
|
|
(1,839 |
) |
|
|
|
|
|
Common Unit distributions
|
|
|
|
|
|
|
|
|
|
|
(306,189 |
) |
|
|
|
|
|
|
(306,189 |
) |
|
|
(41,782 |
) |
|
|
(347,971 |
) |
|
A-1 Common Units converted into A-2 Common Units
|
|
|
|
|
|
|
|
|
|
|
41,723 |
|
|
|
|
|
|
|
41,723 |
|
|
|
(41,723 |
) |
|
|
|
|
|
Conversion of Preferred Units into Common Units
|
|
|
(30,680 |
) |
|
|
|
|
|
|
30,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of DownREIT Perpetual Preferred Units
|
|
|
|
|
|
|
73,180 |
|
|
|
|
|
|
|
|
|
|
|
73,180 |
|
|
|
|
|
|
|
73,180 |
|
|
Common Unit repurchases
|
|
|
|
|
|
|
|
|
|
|
(15,362 |
) |
|
|
|
|
|
|
(15,362 |
) |
|
|
|
|
|
|
(15,362 |
) |
|
Preferred Unit repurchases
|
|
|
|
|
|
|
(49,393 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(49,404 |
) |
|
|
|
|
|
|
(49,404 |
) |
|
Proceeds from Distribution Reinvestment Plan (DRIP)
|
|
|
|
|
|
|
|
|
|
|
45,471 |
|
|
|
|
|
|
|
45,471 |
|
|
|
|
|
|
|
45,471 |
|
|
Adjustment to redemption value
|
|
|
|
|
|
|
|
|
|
|
67,499 |
|
|
|
|
|
|
|
67,499 |
|
|
|
(67,499 |
) |
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
(12,000 |
) |
|
|
47,068 |
|
|
|
|
|
|
|
35,068 |
|
|
|
21,143 |
|
|
|
56,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
194,671 |
|
|
|
160,550 |
|
|
|
3,456,259 |
|
|
|
(12,339 |
) |
|
|
3,799,141 |
|
|
|
579,598 |
|
|
|
4,378,739 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
433,657 |
|
|
|
|
|
|
|
433,657 |
|
|
|
60,534 |
|
|
|
494,191 |
|
|
|
Change in fair value of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,439 |
|
|
|
3,439 |
|
|
|
|
|
|
|
3,439 |
|
|
|
Change in fair value of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,135 |
|
|
|
23,135 |
|
|
|
|
|
|
|
23,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
520,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Unit distribution
|
|
|
|
|
|
|
|
|
|
|
(26,153 |
) |
|
|
|
|
|
|
(26,153 |
) |
|
|
|
|
|
|
(26,153 |
) |
|
UPREIT Preferred Unit Distribution
|
|
|
|
|
|
|
|
|
|
|
5,156 |
|
|
|
|
|
|
|
5,156 |
|
|
|
(5,156 |
) |
|
|
|
|
|
Common Unit distributions
|
|
|
|
|
|
|
|
|
|
|
(245,460 |
) |
|
|
|
|
|
|
(245,460 |
) |
|
|
(31,575 |
) |
|
|
(277,035 |
) |
|
A-1 Common Units converted into A-2 Common Units
|
|
|
|
|
|
|
|
|
|
|
25,534 |
|
|
|
|
|
|
|
25,534 |
|
|
|
(25,534 |
) |
|
|
|
|
|
Conversion of Preferred Units into Common Units
|
|
|
(143,416 |
) |
|
|
|
|
|
|
143,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Unit repurchases
|
|
|
|
|
|
|
|
|
|
|
(13,163 |
) |
|
|
|
|
|
|
(13,163 |
) |
|
|
|
|
|
|
(13,163 |
) |
|
Preferred Unit repurchases
|
|
|
(1,255 |
) |
|
|
(430 |
) |
|
|
(196 |
) |
|
|
|
|
|
|
(1,881 |
) |
|
|
|
|
|
|
(1,881 |
) |
|
Exercise of Options
|
|
|
|
|
|
|
|
|
|
|
43,420 |
|
|
|
|
|
|
|
43,420 |
|
|
|
|
|
|
|
43,420 |
|
|
Proceeds from Distribution Reinvestment Plan (DRIP)
|
|
|
|
|
|
|
|
|
|
|
48,126 |
|
|
|
|
|
|
|
48,126 |
|
|
|
|
|
|
|
48,126 |
|
|
Issuance of A-1 Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
47,575 |
|
|
|
47,575 |
|
|
Adjustment to redemption value
|
|
|
|
|
|
|
|
|
|
|
(112,337 |
) |
|
|
|
|
|
|
(112,337 |
) |
|
|
112,337 |
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
35,055 |
|
|
|
|
|
|
|
35,055 |
|
|
|
(29,855 |
) |
|
|
5,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
$ |
50,000 |
|
|
$ |
160,120 |
|
|
$ |
3,793,314 |
|
|
$ |
14,235 |
|
|
$ |
4,017,669 |
|
|
$ |
707,924 |
|
|
$ |
4,725,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
542,342 |
|
|
|
|
|
|
|
542,342 |
|
|
|
70,281 |
|
|
|
612,623 |
|
|
|
Change in fair value of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,750 |
|
|
|
3,750 |
|
|
|
|
|
|
|
3,750 |
|
|
|
Change in fair value of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,410 |
) |
|
|
(22,410 |
) |
|
|
|
|
|
|
(22,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
593,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Unit distribution
|
|
|
|
|
|
|
|
|
|
|
(16,254 |
) |
|
|
|
|
|
|
(16,254 |
) |
|
|
1,726 |
|
|
|
(14,528 |
) |
|
Common Unit distributions
|
|
|
|
|
|
|
|
|
|
|
(539,116 |
) |
|
|
|
|
|
|
(539,116 |
) |
|
|
(64,437 |
) |
|
|
(603,553 |
) |
|
A-1 Common Units converted into A-2 Common Units
|
|
|
|
|
|
|
|
|
|
|
47,949 |
|
|
|
|
|
|
|
47,949 |
|
|
|
(47,949 |
) |
|
|
|
|
|
A-2 Common Unit repurchases
|
|
|
|
|
|
|
|
|
|
|
(95,668 |
) |
|
|
|
|
|
|
(95,668 |
) |
|
|
|
|
|
|
(95,668 |
) |
|
Conversion of Preferred Units into Common Units
|
|
|
(50,000 |
) |
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Unit repurchases
|
|
|
|
|
|
|
(90,598 |
) |
|
|
|
|
|
|
|
|
|
|
(90,598 |
) |
|
|
|
|
|
|
(90,598 |
) |
|
Exercise of Options
|
|
|
|
|
|
|
|
|
|
|
61,467 |
|
|
|
|
|
|
|
61,467 |
|
|
|
|
|
|
|
61,467 |
|
|
Issuance of A-1 Common Units in exchange for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,788 |
|
|
|
10,788 |
|
|
Issuance of A-2 Common Units in exchange for real estate
|
|
|
|
|
|
|
|
|
|
|
4,502 |
|
|
|
|
|
|
|
4,502 |
|
|
|
|
|
|
|
4,502 |
|
|
Adjustment to redemption value
|
|
|
|
|
|
|
|
|
|
|
(207,067 |
) |
|
|
|
|
|
|
(207,067 |
) |
|
|
207,067 |
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(2,740 |
) |
|
|
|
|
|
|
(2,740 |
) |
|
|
|
|
|
|
(2,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
$ |
|
|
|
$ |
69,522 |
|
|
$ |
3,638,729 |
|
|
$ |
(4,425 |
) |
|
$ |
3,703,826 |
|
|
$ |
885,400 |
|
|
$ |
4,589,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
ARCHSTONE-SMITH OPERATING TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
612,623 |
|
|
$ |
494,191 |
|
|
$ |
356,725 |
|
|
Adjustments to reconcile net earnings to net cash flow provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
227,000 |
|
|
|
210,427 |
|
|
|
212,178 |
|
|
|
Gains on dispositions of depreciated real estate, net
|
|
|
(446,447 |
) |
|
|
(353,600 |
) |
|
|
(139,604 |
) |
|
|
Gains on the sale of marketable equity securities and property
management business
|
|
|
(28,162 |
) |
|
|
|
|
|
|
|
|
|
|
Provisions for possible loss on investments
|
|
|
|
|
|
|
3,714 |
|
|
|
2,611 |
|
|
|
Minority interest
|
|
|
(460 |
) |
|
|
|
|
|
|
4,871 |
|
|
|
Income from unconsolidated entities
|
|
|
(17,902 |
) |
|
|
(5,745 |
) |
|
|
(53,602 |
) |
|
Change in other assets
|
|
|
526 |
|
|
|
19,441 |
|
|
|
(25,597 |
) |
|
Change in accounts payable, accrued expenses and other
liabilities
|
|
|
32,113 |
|
|
|
(18,583 |
) |
|
|
40,462 |
|
|
Other, net
|
|
|
(9,519 |
) |
|
|
(6,149 |
) |
|
|
(6,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by operating activities
|
|
|
369,772 |
|
|
|
343,696 |
|
|
|
392,043 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments
|
|
|
(1,423,549 |
) |
|
|
(932,777 |
) |
|
|
(910,544 |
) |
|
Change in investments in and advances to unconsolidated
entities, net
|
|
|
2,473 |
|
|
|
35,972 |
|
|
|
177,727 |
|
|
Proceeds from dispositions, net of closing costs
|
|
|
1,816,272 |
|
|
|
1,563,556 |
|
|
|
579,451 |
|
|
Change in tax-deferred exchange escrow
|
|
|
60,825 |
|
|
|
(180,920 |
) |
|
|
120,421 |
|
|
Other, net
|
|
|
96,367 |
|
|
|
(57,665 |
) |
|
|
(104,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in) investing activities
|
|
|
552,388 |
|
|
|
428,166 |
|
|
|
(137,401 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Long-Term Unsecured Debt
|
|
|
297,052 |
|
|
|
247,225 |
|
|
|
530,774 |
|
|
Payments on Long-Term Unsecured Debt
|
|
|
(72,950 |
) |
|
|
(171,250 |
) |
|
|
(97,500 |
) |
|
Principal prepayment of mortgages payable, including prepayment
penalties
|
|
|
(159,558 |
) |
|
|
(343,368 |
) |
|
|
(705,103 |
) |
|
Regularly scheduled principal payments on mortgages payable
|
|
|
(11,512 |
) |
|
|
(11,934 |
) |
|
|
(11,761 |
) |
|
Proceeds from mortgage notes payable
|
|
|
51,656 |
|
|
|
76,017 |
|
|
|
247,797 |
|
|
Proceeds from (payments on) unsecured credit facilities, net
|
|
|
(84,790 |
) |
|
|
(261,788 |
) |
|
|
176,989 |
|
|
Proceeds from Common Units issued under DRIP and employee stock
options
|
|
|
61,467 |
|
|
|
91,546 |
|
|
|
69,772 |
|
|
Repurchase of Common Units and Preferred Units
|
|
|
(146,954 |
) |
|
|
(15,044 |
) |
|
|
(64,776 |
) |
|
Repurchase of Series E and F Perpetual Preferred Units
|
|
|
(42,712 |
) |
|
|
|
|
|
|
|
|
|
Redemption of Perpetual Preferred Units
|
|
|
|
|
|
|
|
|
|
|
(12,000 |
) |
|
Cash distributions paid on Common Units
|
|
|
(603,553 |
) |
|
|
(365,009 |
) |
|
|
(344,590 |
) |
|
Cash distributions paid on Preferred Units
|
|
|
(14,527 |
) |
|
|
(28,371 |
) |
|
|
(34,351 |
) |
|
Cash distributions paid to minority interests
|
|
|
|
|
|
|
|
|
|
|
(5,165 |
) |
|
Other, net
|
|
|
2,246 |
|
|
|
2,498 |
|
|
|
1,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow used in financing activities
|
|
|
(724,135 |
) |
|
|
(779,478 |
) |
|
|
(248,823 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
198,025 |
|
|
|
(7,616 |
) |
|
|
5,819 |
|
Cash and cash equivalents at beginning of period
|
|
|
5,230 |
|
|
|
12,846 |
|
|
|
7,027 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
203,255 |
|
|
$ |
5,230 |
|
|
$ |
12,846 |
|
|
|
|
|
|
|
|
|
|
|
See Note 15 for supplemental information on non-cash
investing and financing activities.
The accompanying notes are an integral part of these
consolidated financial statements.
61
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(The glossary included in this Annual Report is hereby
incorporated by reference)
|
|
(1) |
Description of Business and Summary of Significant Accounting
Policies |
Archstone-Smith is structured as an UPREIT under which all
property ownership and business operations are conducted through
the Operating Trust. Archstone-Smith is our are the sole trustee
and owns approximately 89.1% of our outstanding common units. As
used herein, we, our and the
company refers to the Operating Trust and
Archstone-Smith, collectively, except where the context
otherwise requires. Archstone-Smith is an equity REIT organized
under the laws of the State of Maryland. We focus on creating
value for our shareholders by acquiring, developing and
operating apartments in markets characterized by very expensive
single-family home prices and a strong, limited land on which to
build new housing, diversified economic base and employment
growth potential.
|
|
|
Principles of Consolidation |
The accounts of the Operating Trust and its controlled
subsidiaries are consolidated in the accompanying financial
statements. All significant inter-company accounts and
transactions have been eliminated. We use the equity method to
account for investments that do not qualify as variable interest
entities or where we do not own a majority of the economic
interest, but have the ability to exercise significant influence
over the operating and financial policies of the investee. For
an investee accounted for under the equity method, our share of
net earnings or losses of the investee is reflected in income as
earned and distributions are credited against the investment as
received.
We adopted FASB Interpretation No. 46
Consolidation of Variable Interest Entities
(revised) on July 1, 2003. As a result, the
accompanying consolidated financial statements have been
restated to reflect the consolidated financial position and
results of operations of Archstone-Smith Trust and certain
previously unconsolidated entities in accordance with accounting
principles generally accepted in the United States of America.
We previously accounted for Ameriton using the equity method.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect amounts reported in the financial statements and the
related notes. Actual results could differ from
managements estimates. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected
in the period they are determined to be necessary.
For properties accounted for under SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived
Assets, the results of operations for properties sold
during the period or classified as held for sale at the end of
the current period are required to be classified as discontinued
operations in the current and prior periods. The
property-specific components of net earnings that are classified
as discontinued operations include rental revenue, rental
expense, real estate tax, depreciation expense and interest
expense (actual interest expense for encumbered properties and a
pro-rata allocation of interest expense for any unencumbered
portion up to our weighted average leverage ratio). The net gain
or loss on the eventual disposal of the held for sale properties
is also required to be classified as discontinued operations.
Properties sold by our unconsolidated entities are not included
in discontinued operations and related gains or losses are
reported as a component of income from unconsolidated entities.
62
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents consist of cash on hand, demand
deposits with financial institutions and short-term, highly
liquid investments. We consider all highly liquid instruments
with maturities when purchased of three months or less to be
cash equivalents.
|
|
|
Restricted Cash in Tax-Deferred Exchange and Bond
Escrow |
Disposition proceeds are set aside and designated to fund future
tax-deferred exchanges of qualifying real estate investments. If
these proceeds are not redeployed to qualifying real estate
investments within 180 days, these funds are redesignated
as cash and cash equivalents. Additionally, cash held in escrow
to fund future developments costs and cash held as security
deposits are classified as restricted cash.
|
|
|
Marketable Securities and Other Investments |
All publicly traded equity securities are classified as
available for sale and carried at fair value, with
unrealized gains and losses reported as a separate component of
unitholders equity. Private investments, for which we do
not have the ability to exercise significant influence, are
accounted for at cost. Declines in the value of public and
private investments that management determines are other than
temporary are recorded as a provision for loss on investments.
|
|
|
Real Estate and Depreciation |
Real estate, other than properties held for sale, is carried at
depreciated cost. Long-lived assets designated as being held for
sale are reported at the lower of their carrying amount or
estimated fair value less cost to sell, and thereafter are no
longer depreciated.
We allocate the cost of newly acquired properties between net
tangible and identifiable intangible assets. The primary
intangible asset associated with an apartment community
acquisition is the value of the existing lease agreements. When
allocating cost to an acquired property, we first allocate costs
to the estimated intangible value of the existing lease
agreements and then to the estimated value of the land, building
and fixtures assuming the property is vacant. We estimate the
intangible value of the lease agreements by determining the lost
revenue associated with a hypothetical lease-up. We depreciate
the building and fixtures based on the expected useful life of
the asset and amortize the intangible value of the lease
agreements over the average remaining life of the existing
leases.
In accordance with SFAS No. 144, long-lived assets,
such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities classified as
held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
We have an investment organization that is responsible for
development and redevelopment of apartment communities.
Consistent with GAAP, all direct and certain indirect costs,
including interest and real estate taxes, incurred during
development and redevelopment activities are capitalized.
Interest is capitalized on real estate assets that require a
period of time to get them ready for their intended use. The
amount of interest capitalized is based upon the average amount
of accumulated development expenditures during the reporting
period. Included in capitalized costs are managements
estimates of the direct and incremental personnel costs
63
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and indirect project costs associated with our development and
redevelopment activities. Indirect project costs consist
primarily of personnel costs associated with construction
administration and development accounting, legal fees, and
various office costs that clearly relate to projects under
development.
Depreciation is computed over the expected useful lives of
depreciable property on a straight-line basis as follows:
|
|
|
Buildings and related land improvements
|
|
15-40 years |
Furniture, fixtures, equipment and other
|
|
5-10 years |
Intangible value of lease agreements
|
|
6-12 months |
During 2004, 2003 and 2002, the total interest paid in cash on
all outstanding debt was $229.6 million,
$244.8 million and $269.8 million, respectively.
We capitalize interest during the construction period as part of
the cost of apartment communities under development. Interest
capitalized during 2004, 2003 and 2002 aggregated
$23.6 million, $26.9 million and $32.4 million,
respectively.
Costs incurred in connection with the issuance of equity
securities are deducted from unitholders equity. Costs
incurred in connection with the issuance or renewal of debt are
subject to the provisions of EITF 96-19. Accordingly, if
the terms of the renewed or modified debt instrument are deemed
to be substantially different (i.e., a 10 percent or more
difference in the present value of the remaining cash flows),
all unamortized loan costs associated with the extinguished debt
are charged against earnings during the current period;
otherwise, costs are capitalized as other assets and amortized
into interest expense over the term of the related loan or the
renewal period. The balance of any unamortized loan costs
associated with old debt is expensed upon replacement with new
debt. We utilize the straight-line method to amortize debt
issuance costs as it approximates the effective interest method
required under SFAS No. 91. Amortization of loan costs
included in interest expense for 2004, 2003 and 2002 was
$4.4 million, $4.5 million and $5.0 million,
respectively.
|
|
|
Moisture Infiltration and Mold Remediation Costs |
We estimate and accrue costs related to the correction of
moisture infiltration and related mold remediation when we
anticipate incurring such remediation costs because of the
assertion of a legal claim or threatened litigation. When we
incur remediation costs at our own discretion, the cost is
recognized as incurred. Costs of addressing moisture
infiltration and resulting mold remediation issues are only
capitalized, subject to recoverability, when it is determined by
management that such costs also extend the life, increase the
capacity, or improve the safety or efficiency of the property
relative to when the community was originally constructed or
acquired, if later. All other related costs are expensed.
|
|
|
Interest Rate Contracts/ Forward Sales Contracts |
We utilize derivative financial instruments to manage our
interest rate risk and exposure to changes in the fair value of
certain investments in equity securities. We designate these
financial instruments as hedges of specific liabilities or
anticipated transactions. During 2003, we adopted
SFAS No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities.
Under SFAS No. 149, the resulting assets and
liabilities associated with derivative financial instruments are
carried on our financial statements at estimated fair value at
the end of each reporting period. The changes in the fair value
of a fair value hedge and the fair value of the items hedged are
recorded in earnings for each reporting period. The change in
the fair
64
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of effective cash flow hedges are carried on our financial
statements as a component of accumulated other comprehensive
income (loss). If effective, fair value hedges have no impact on
our current earnings.
|
|
|
Revenue and Gain Recognition |
We generally lease our apartment units under operating leases
with terms of one year or less. Rental income related to leases
is recognized on an accrual basis when due from residents in
accordance with Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 104,
Revenue Recognition and Statement of Financial
Accounting Standards SFAS No. 13, Accounting for
Leases. Rent concessions are recognized as an offset to
revenues collected over the term of the underlying lease. We use
the full accrual method of profit recognition in accordance with
SFAS No. 66 to record gains on sales of real estate.
Accordingly, we evaluate the related GAAP requirements in
determining the profit to be recognized at the date of each sale
transaction (i.e., the profit is determinable and the earnings
process is complete).
Rental expenses shown on the accompanying Statements of Earnings
include costs associated with on-site and property management
personnel, utilities (net of utility reimbursements from
residents), repairs and maintenance, property insurance,
marketing, landscaping and other on-site and related
administrative costs.
We generally recognize legal expenses as incurred; however, if
such fees are related to the accrual for an estimated legal
settlement, we accrue for the related incurred and anticipated
legal fees at the same time we accrue the cost of settlement.
As of December 31, 2004, the Company has one stock-based
employee compensation plan. Effective January 1, 2003, the
Company adopted the fair value recognition provision of
SFAS No. 123, Accounting for Stock-Based
Compensation, prospectively to all employee awards
granted, modified or settled after January 1, 2003, which
results in expensing of options. During 2004, we granted
approximately 300,000 Restricted Share Units and 648,000 stock
options. No significant employee awards were granted during
2003. For employee awards granted prior to January 1, 2003,
the Company accounted for this plan under the recognition and
measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. With respect to options granted under
the plan prior to January 1, 2003, no stock-based employee
compensation expense is reflected in the accompanying condensed
consolidated statements of earnings, as all options granted
under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings and
65
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period
(dollar amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net earnings attributable to Common Units Basic
|
|
$ |
596,369 |
|
|
$ |
468,038 |
|
|
$ |
322,416 |
|
Add: Stock-based employee compensation expense included in
reported net earnings
|
|
|
297 |
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(2,059 |
) |
|
|
(1,982 |
) |
|
|
(2,094 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings attributable to Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
594,607 |
|
|
$ |
466,056 |
|
|
$ |
320,322 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per Common Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
2.71 |
|
|
$ |
2.20 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
2.70 |
|
|
$ |
2.20 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
2.69 |
|
|
$ |
2.18 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
2.68 |
|
|
$ |
2.17 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
The following is a table of the assumptions used to value
options for the respective grant year using the Black-Scholes
model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Weighted average risk-free interest rate
|
|
|
3.77 |
% |
|
|
3.48 |
% |
|
|
3.54 |
% |
Weighted average dividend yield
|
|
|
5.63 |
% |
|
|
6.92 |
% |
|
|
6.74 |
% |
Weighted average volatility
|
|
|
21.97 |
% |
|
|
15.33 |
% |
|
|
19.58 |
% |
Weighted average expected option life
|
|
|
5.0 years |
|
|
|
5.0 years |
|
|
|
5.0 years |
|
We have made an election to be taxed as a partnership under the
Internal Revenue Code of 1986, as amended, and we believe we
qualify as a partnership and have made all required
distributions of our taxable income. See Note 13 for more
information on income taxes.
Income taxes for our taxable REIT subsidiaries are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date.
Comprehensive income, which is defined as net earnings and all
other non-owner changes in equity, is displayed in the
accompanying Statements of Unitholders Equity, Other
Common Unitholders Interest and Comprehensive Income
(Loss). Other comprehensive income (loss) reflects unrealized
holding gains and losses on the available-for-sale investments
and changes in the fair value of effective cash flow hedges as
described above (see Interest Rate Contracts/
Forward Sale Contracts).
66
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our accumulated other comprehensive income (loss) for the year
ended December 31, 2004 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net | |
|
|
|
|
|
|
Unrealized | |
|
|
|
Accumulated | |
|
|
Gains on | |
|
|
|
Other | |
|
|
Marketable | |
|
Cash Flow | |
|
Comprehensive | |
|
|
Securities | |
|
Hedges | |
|
Earnings/(Loss) | |
|
|
| |
|
| |
|
| |
Balance at December 31, 2003
|
|
$ |
23,808 |
|
|
$ |
(9,573 |
) |
|
$ |
14,235 |
|
Change in fair value of cash flow hedges
|
|
|
|
|
|
|
6,098 |
|
|
|
6,098 |
|
Change in fair value of long-term debt hedges
|
|
|
|
|
|
|
(2,348 |
) |
|
|
(2,348 |
) |
Mark to market for marketable equity securities
|
|
|
1,372 |
|
|
|
|
|
|
|
1,372 |
|
Reclassification adjustments for realized net gains
|
|
|
(23,782 |
) |
|
|
|
|
|
|
(23,782 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
1,398 |
|
|
$ |
(5,823 |
) |
|
$ |
(4,425 |
) |
|
|
|
|
|
|
|
|
|
|
Following is a reconciliation of basic net earnings attributable
to Common Units to diluted net earnings attributable to Common
Units for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Reconciliation of numerator between basic and diluted net
earnings per Common Unit(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Common Units Basic
|
|
$ |
596,369 |
|
|
$ |
468,038 |
|
|
$ |
322,416 |
|
|
Distributions on Convertible Preferred Units
|
|
|
3,755 |
|
|
|
12,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Common Units Diluted(2)
|
|
$ |
600,124 |
|
|
$ |
480,910 |
|
|
$ |
322,416 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of denominator between basic and diluted net
earnings per Common Unit(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common Units outstanding
Basic
|
|
|
220,053 |
|
|
|
212,288 |
|
|
|
202,781 |
|
|
Assumed conversion of Preferred Units into Common Units
|
|
|
2,182 |
|
|
|
7,972 |
|
|
|
|
|
|
Incremental options and warrants
|
|
|
952 |
|
|
|
498 |
|
|
|
1,023 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common Units outstanding
Diluted
|
|
|
223,187 |
|
|
|
220,758 |
|
|
|
203,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes the impact of 13.1 million convertible equity
securities during 2002 as they were anti-dilutive. |
|
|
|
Market Concentration Risk |
At December 31, 2004, approximately 39.4% of our apartment
communities are located in the Washington, D.C.
metropolitan area, based on NOI. Approximately 18.9% of our
apartment communities are located in Southern California at
December 31, 2004, based on NOI. Southern California is the
geographic area comprised of the Los Angeles County, the Inland
Empire, Orange County, San Diego and Ventura County
markets. Additionally, approximately 8.2% of our apartment
communities are located in the San Francisco Bay area of
California at December 31, 2004, based on NOI. We are,
therefore, subject to increased exposure (positive or negative)
to economic and other competitive factors specific to protected
markets within these geographic areas.
67
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Preferred Share Redemptions |
When redeeming Preferred Units, we recognize share issuance
costs as a charge to earnings in accordance with Financial
Accounting Standards Board (FASB)
Emerging Issues Task Force (EITF) Topic D-42,
The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred
Stock. In July 2003, the Securities and Exchange
Commission (SEC) staff issued a clarification of the
SECs position on the application of FASB-EITF
Topic D-42. The SEC staffs position, as clarified, is
that in applying Topic D-42, the carrying value of
preferred Units that are redeemed should be reduced by the
amount of original issuance costs, regardless of where in
unitholders equity those costs are reflected.
Certain prior year amounts have been reclassified to conform to
the current presentation.
|
|
|
New Accounting Pronouncements |
In November 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 151,
Inventory Costs an amendment of ARB No. 43,
Chapter 4. This Statement is effective for the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material associated with
inventory costs incurred during fiscal years beginning after
June 15, 2005. The Statement requires that the
above-mentioned items be recognized as current-period charges.
We do not believe that the adoption of SFAS No. 151
will have a material impact on our financial position, net
earnings or cash flows.
In December, 2004, the FASB issued SFAS No. 152,
Accounting for Real Estate Time-Sharing Transactions an
amendment of FASB Statements No. 66 and 67. This
Statement amends SFAS No. 66, Accounting for
Sales of Real Estate to reference the financial
accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate
Time-Sharing Transactions. This Statement also amends
SFAS No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects to specify
that guidance relating to (a) incidental operations
(b) costs incurred to sell real estate projects does not
apply to real estate time-sharing transactions. This Statement
is effective for fiscal years beginning after June 15,
2005. We do not believe that the adoption of
SFAS No. 152 will have a material impact on our
financial position, net earnings or cash flows.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Non-monetary Assets an amendment of APB
No. 29. This Statement amends APB Opinion
No. 29, Accounting for Non-monetary
Transactions to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. That exception required
that some non-monetary exchanges be recorded on a carryover
basis versus this Statement, which requires that an entity
record a non-monetary exchange at fair value and recognize any
gain or loss if the transaction has commercial substance. This
Statement is effective for fiscal years beginning after
June 15, 2005. We do not believe that the adoption of
SFAS No. 153 will have a material impact on our
financial position, net earnings or cash flows.
In December 2004, the FASB issued SFAS No. 123 revised
2004, Share-Based Payment. This Statement is
a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supercedes APB
No. 25, Accounting for Stock Issued to
Employees. The Statement requires companies to
recognize in the income statement the grant-date fair value of
stock options and other equity based compensation issued to
employees. This Statement is effective as of the beginning of
the first interim or annual period that commences after
June 15, 2005. We do not believe that the adoption of
SFAS N. 123 revised 2004 will have a material impact on our
financial position, net earnings and cash flows.
68
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2004, the FASB issued EITF Issue No. 03-6,
Participating Securities and the Two-Class Method
under FASB Statement No. 128, Earnings per Share
(EITF No. 03-6). This issue address whether the
two-class method requires the presentation of basic and diluted
EPS for all participating securities and how a participating
security should be defined. The guidance to this issue should be
applied to reporting periods beginning after March 31,
2004. Prior period earnings per share amounts presented for
comparative purposes should be restated to conform to the
guidance in this consensus. The adoption of EITF No. 03-6
had no impact on our financial position, net earnings or cash
flows.
In October 2004, the FASB issued EITF Issue No. 04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share (EITF No. 04-8). This
Issue addresses when contingently convertible instruments should
be included in diluted earnings per share and should be applied
for reporting periods ending after December 15, 2004. The
adoption of EITF No. 04-8 had no impact on our financial
position, net earnings or cash flows.
In November 2004, the FASB issued EITF Issue No. 03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, in Determining Whether to Report Discontinued
Operations (EITF No. 03-13). This issue
assists in the development of a model for evaluating
(a) which cash flows are to be considered in determining
whether cash flows have been or will be eliminated and
(b) what types of continuing involvement constitute
significant continuing involvement. The guidance in this issue
should be applied to a component of an enterprise that is either
disposed of or classified as held for sale in fiscal periods
beginning after December 15, 2004. Previously reported
operating results related to disposal transactions initiated
within an enterprises fiscal year that includes the date
that this consensus was ratified (November 30, 2004) may be
reclassified. The adoption of EITF No. 03-13 had no
impact on our financial position, net earnings or cash flows.
In September 2004, the FASB issued EITF Issue
No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(EITF No. 03-1). The guidance in EITF No. 03-1
was effective for other-than-temporary impairment evaluations
made in reporting periods beginning after June 15, 2004.
However, certain provisions regarding the assessment of whether
an impairment is other than temporary have been delayed.
Although the disclosure requirements continue to be effective in
annual financial statements for fiscal years ending after
December 15, 2003, for investments accounted for under
SFAS No. 115 and 124. For all other investments
addressed by EITF No. 03-1, the disclosures continue
to be effective in annual financial statements for fiscal years
ending after June 15, 2004. The adoption of
EITF No. 03-1 had no impact on our financial position,
net earnings or cash flows.
69
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(2) Real Estate
|
|
|
Investments in Real Estate |
Investments in real estate, at cost, were as follows (dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Investment | |
|
Units(1) | |
|
Investment | |
|
Units(1) | |
|
|
| |
|
| |
|
| |
|
| |
Operating Trust apartment communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating communities
|
|
$ |
8,018,658 |
|
|
|
58,486 |
|
|
$ |
8,067,075 |
|
|
|
63,848 |
|
|
Communities under construction
|
|
|
499,239 |
|
|
|
3,237 |
|
|
|
301,634 |
|
|
|
2,607 |
|
|
Development communities In Planning:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
51,822 |
|
|
|
1,251 |
|
|
|
95,911 |
|
|
|
2,633 |
|
|
|
Under control(2)
|
|
|
|
|
|
|
593 |
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total development communities In Planning
|
|
|
51,822 |
|
|
|
1,844 |
|
|
|
95,911 |
|
|
|
2,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Trust apartment communities
|
|
|
8,569,719 |
|
|
|
63,567 |
|
|
|
8,464,620 |
|
|
|
69,200 |
|
|
Ameriton apartment communities
|
|
|
581,910 |
|
|
|
6,198 |
|
|
|
494,338 |
|
|
|
5,646 |
|
|
Other
|
|
|
69,409 |
|
|
|
|
|
|
|
40,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
$ |
9,221,038 |
|
|
|
69,765 |
|
|
$ |
8,999,180 |
|
|
|
74,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Unit information is based on managements estimates and has
not been audited or reviewed by our independent auditors. |
|
(2) |
Our investment as of December 31, 2004 and
December 31, 2003 for development communities Under Control
was $1.5 million and $1.1 million, respectively, and
are reflected in the Other assets caption of our
Consolidated Balance Sheets. |
In conjunction with the underwriting of each acquisition of an
operating community, we prepare acquisition budgets that
encompass the incremental capital needed to achieve our
investment objectives. These expenditures, combined with the
initial purchase price and related closing costs, are
capitalized and classified as acquisition-related
capital expenditures, as incurred.
As part of our operating strategy, we periodically evaluate each
communitys physical condition relative to established
business objectives and the communitys competitive
position in its market. In conducting these evaluations, we
consider our return on investment in relation to our long-term
cost of capital as well as our research and analysis of
competitive market factors. Based on these factors, we make
decisions on incremental capital expenditures, which are
classified as either redevelopment or
recurring.
The redevelopment category includes: (i) redevelopment
initiatives, which are intended to reposition the community in
the marketplace and include items such as significant upgrades
to the interiors, exteriors, landscaping and amenities;
(ii) revenue-enhancing expenditures, which include
investments that are expected to produce incremental community
revenues, such as building garages, carports and storage
facilities or gating a community; and
(iii) expense-reducing expenditures, which include items
such as water submetering systems and xeriscaping that reduce
future operating costs.
Recurring capital expenditures consist of significant
expenditures for items having a useful life in excess of one
year, which are incurred to maintain a communitys
long-term physical condition at a level
70
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
commensurate with our stringent operating standards. Examples of
recurring capital expenditures include roof replacements,
certain make-ready expenditures, parking lot resurfacing and
exterior painting.
The change in investments in real estate, at cost, consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
8,999,180 |
|
|
$ |
9,297,735 |
|
|
|
Acquisition-related expenditures
|
|
|
1,080,639 |
|
|
|
573,768 |
|
|
Redevelopment expenditures
|
|
|
40,999 |
|
|
|
69,649 |
|
|
Recurring capital expenditures
|
|
|
50,147 |
|
|
|
48,960 |
|
|
Development expenditures, excluding land acquisitions
|
|
|
333,782 |
|
|
|
91,430 |
|
|
Acquisition and improvement of land for development
|
|
|
175,470 |
|
|
|
125,581 |
|
|
Dispositions
|
|
|
(1,460,046 |
) |
|
|
(1,209,956 |
) |
|
Provision for possible loss on investments
|
|
|
|
|
|
|
(3,714 |
) |
|
|
|
|
|
|
|
|
|
Net apartment community activity
|
|
|
220,991 |
|
|
|
(304,282 |
) |
|
Change in other real estate assets
|
|
|
867 |
|
|
|
5,727 |
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
9,221,038 |
|
|
$ |
8,999,180 |
|
|
|
|
|
|
|
|
At December 31, 2004, we had unfunded contractual
commitments of $485.9 million related to communities under
construction and under redevelopment.
(3) Discontinued Operations
The results of operations for properties sold during the period
or designated as held-for-sale at the end of the period are
required to be classified as discontinued operations. The
property specific components of net earnings that are classified
as discontinued operations include rental revenues, rental
expenses, real estate taxes, depreciation expense, income taxes
and interest expense (actual interest expense for encumbered
properties and a pro-rata allocation of interest expense for any
unencumbered property up to our weighted average leverage
ratio), as well as the net gain or loss on the disposition of
properties.
Consistent with our capital recycling program, we had five
operating apartment communities, representing 1,952 units
(unaudited), classified as held for sale under the provisions of
SFAS No. 144, at December 31, 2004. Accordingly,
we have classified the operating earnings from these five
properties within discontinued operations for the years ended
December 31, 2004, 2003 and 2002. During the twelve months
ended December 31, 2004, we sold 30 REIT and Ameriton
operating communities. The operating results of these
30 communities and the related gain/ loss on sale are also
included in discontinued operations for 2004, 2003 and 2002.
During the twelve months ended December 31, 2003, we sold
48 operating communities. The operating results of these
48 communities and the related gain/ loss on the sale are
also included in discontinued operations for 2003 and 2002. In
addition, discontinued operations for the year ended
December 31, 2002 includes the net operating results of
12 operating communities and one retail property which were
sold during 2002.
71
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of net earnings from discontinued
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Rental revenue
|
|
$ |
113,933 |
|
|
$ |
242,287 |
|
|
$ |
340,897 |
|
Rental expenses
|
|
|
(39,656 |
) |
|
|
(85,012 |
) |
|
|
(107,088 |
) |
Real estate taxes
|
|
|
(12,783 |
) |
|
|
(28,611 |
) |
|
|
(33,856 |
) |
Depreciation on real estate investments
|
|
|
(16,806 |
) |
|
|
(40,633 |
) |
|
|
(58,037 |
) |
Interest expense(1)
|
|
|
(33,503 |
) |
|
|
(51,195 |
) |
|
|
(92,651 |
) |
Income taxes from taxable REIT subsidiaries
|
|
|
(21,567 |
) |
|
|
(12,206 |
) |
|
|
(10,455 |
) |
Provision for possible loss on real estate investment
|
|
|
|
|
|
|
(3,714 |
) |
|
|
(2,611 |
) |
Debt extinguishment costs related to dispositions
|
|
|
(1,763 |
) |
|
|
(3,002 |
) |
|
|
(5,412 |
) |
Gain from the disposition of REIT real estate investments, net
|
|
|
372,217 |
|
|
|
310,901 |
|
|
|
72,934 |
|
Gain from the dispositions of taxable REIT subsidiary real
estate investments, net
|
|
|
74,230 |
|
|
|
42,699 |
|
|
|
30,720 |
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
$ |
434,302 |
|
|
$ |
371,514 |
|
|
$ |
134,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The portion of interest expense included in discontinued
operations that is allocated to properties based on the
Companys leverage ratio was $23.2 million,
$32.7 million and $61.2 million for 2004, 2003 and
2002, respectively. |
Assets held for sale as of December 31, 2004, represented
gross real estate of $262.8 million and $215.8 million
with mortgages payable of $60.6 million and
$61.4 million at December 31, 2004 and 2003,
respectively. Additionally, of our investment in real estate and
debt balances at December 31, 2003, we disposed of
$1.5 billion of real estate and paid off related mortgages
of $85.8 million during the twelve months ended
December 31, 2004.
(4) Investments in and Advances
to Unconsolidated Entities
|
|
|
Sale of Consolidated Engineering Services |
Consolidated Engineering Services is a service business that we
acquired in the Smith Merger in 2001, and prior to its sale had
been reported as an unconsolidated entity in our financial
statements. CES provides engineering services for commercial and
residential real estate across the country. On December 19,
2002, CES was sold to a third party for $178 million in
cash. We recorded a $35.4 million net gain on the sale of
the business or $0.16 per share on a fully diluted basis.
As a condition of sale, we agreed to indemnify the buyer for
certain representations and warranties contained in the sale
contract. During 2004 we recognized $3.2 million of
additional income associated with the expiration of these
contingencies. Additionally, approximately $6.7 million in
contingent proceeds related to indemnification of accounts
receivable over 120 days were excluded from the initial
gain. We recognized $0.9 million and $5.3 million of
these contingent proceeds during 2004 and 2003, respectively. We
also recognized $3.1 million related to settlement of an
ongoing CES lawsuit during 2004.
|
|
|
Sale of Smith Management Construction, Inc. |
Smith Management Construction, Inc. is a service business that
we acquired in the Smith Merger during 2001. We sold SMC during
February 2003 to members of SMCs senior management. Prior
to the sale, we reported SMC as an unconsolidated entity in our
financial statements. We received two notes receivable
72
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
totaling $5.8 million and bearing an interest rate of 7.0%
as consideration for the sale. The first note for
$3.5 million has principal payments that began in October
2003 with payment in full by February 2008. As of
December 31, 2003, the outstanding balance on this note
receivable was $3.1 million. The second note for
$2.3 million was fully repaid along with all accrued
interest due during May 2003. During the second quarter of 2004,
we recognized the divestiture since our responsibilities under
the majority of the outstanding performance guarantees, which
pertain to ongoing construction projects at the time of sale,
expired.
|
|
|
Archstone Management Services |
During May 2003, we sold Archstone Management Services, our
third-party management business. The transaction included
management contracts for 32 communities comprising
10,665 units. The $6.5 million sales price was paid in
three installments based on the retention of the contracts
acquired. During the second quarter of 2004, all contingencies
related to the sale expired and we recognized a gain of
$3.3 million.
|
|
|
Real Estate Joint Ventures |
At December 31, 2004, we had investments in 14 Operating
Trust real estate joint ventures. Our ownership percentage of
economic interests range from 20% to 89%. The voting interest
for major decisions is split 50/ 50 between ourselves and the
venture partners. At December 31, 2004, Ameriton had six
real estate joint ventures in which the venture partners are the
development/ managing members. Voting on major investment
decisions are split 50/ 50 and our venture partners handle all
day-to-day operational decisions. Economic interest in the
ventures varies depending upon the ultimate return of the
venture. The Operating Trust and Ameriton joint ventures do not
qualify as variable interest entities as neither partner is
deemed to substantially benefit from the joint venture.
Accordingly, we utilize the guidance provided by SOP 78-9
Accounting for Investments in Real Estate
Ventures when determining the basis of accounting for
these ventures. Because we do not control the voting interest of
these joint ventures, we account for these entities using the
equity method. In the aggregate, these ventures own 15,671
apartment units. At December 31, 2004, the investment
balance consists of $74.1 million in Operating Trust joint
ventures and $37.4 million in Ameriton joint ventures. At
December 31, 2003, the investment balance consists of
$42.9 million in Operating Trust joint ventures and
$43.5 million in Ameriton joint ventures.
73
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Summary Financial Information |
Combined summary balance sheet data for our investments in
unconsolidated entities presented on a stand-alone basis follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assets:
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$ |
1,115,563 |
|
|
$ |
1,283,904 |
|
|
Other assets
|
|
|
52,394 |
|
|
|
29,577 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,167,957 |
|
|
$ |
1,313,481 |
|
|
|
|
|
|
|
|
Liabilities and owners equity:
|
|
|
|
|
|
|
|
|
|
Inter-company debt payable to Operating Trust
|
|
$ |
4,124 |
|
|
$ |
2,779 |
|
|
Mortgages payable
|
|
|
777,924 |
|
|
|
913,142 |
|
|
Other liabilities
|
|
|
24,254 |
|
|
|
20,804 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
806,302 |
|
|
|
936,725 |
|
|
|
|
|
|
|
|
|
Owners equity
|
|
|
361,655 |
|
|
|
376,756 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$ |
1,167,957 |
|
|
$ |
1,313,481 |
|
|
|
|
|
|
|
|
Selected summary results of operations for our unconsolidated
investees presented on a stand-alone basis follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Operating Trust Joint Ventures(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
140,390 |
|
|
$ |
145,567 |
|
|
$ |
145,061 |
|
|
Net Earnings
|
|
|
29,559 |
|
|
|
7,726 |
|
|
|
16,118 |
|
Ameriton Joint Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
5,950 |
|
|
$ |
11,549 |
|
|
$ |
9,977 |
|
|
Net Earnings
|
|
|
(713 |
) |
|
|
(4,569 |
) |
|
|
(1,716 |
) |
Service Businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
432,193 |
|
|
Net Earnings
|
|
|
|
|
|
|
|
|
|
|
5,227 |
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
146,340 |
|
|
$ |
157,116 |
|
|
$ |
587,231 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
28,846 |
|
|
$ |
3,157 |
|
|
$ |
19,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes $32.4 million, $0 and $2.6 million of gains
associated with the disposition of Joint Ventures during 2004,
2003 and 2002, respectively. |
Our income from unconsolidated entities differs from the
stand-alone net earnings from the investees presented above due
to various accounting adjustments made in accordance with GAAP.
Examples of these differences include: (i) only recording
our proportionate share of net earnings in the unconsolidated
investees; (ii) the impact of certain eliminating
inter-company transactions; (iii) timing differences in
income recognition due to deferral of gains on contribution of
properties to joint ventures; and (iv) a gain on the sale
of CES, as previously discussed. Additionally, we have incurred
certain joint venture formation costs at the Operating Trust
level which we account for as outside basis as these costs are
not reflected on the stand-alone
74
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial statements of the joint venture. These amounts are
reflected on our consolidated financial statements and are
amortized over the life of the underlying assets.
We generally do not guarantee third party debt incurred by our
unconsolidated investees. Investee third-party debt consists
principally of mortgage notes payable. Generally, mortgages on
real estate assets owned by our unconsolidated investees are
secured by the underlying properties. We generally do not
guarantee third party debt incurred by our unconsolidated
investees; however, the investees and/or Archstone-Smith are
occasionally required to guarantee the mortgages along with all
other venture partners. As of December 31, 2004, we have
not been required to perform under any guarantees provided to
our joint ventures.
|
|
|
Unsecured Credit Facilities |
In December 2004, we restructured our unsecured revolving credit
facility provided by a group of financial institutions led by
JPMorgan Chase Bank. The primary modifications were extending
the maturity, reducing the pricing and lowering thee
capitalization rate used to value the operating portfolio. The
$600 million facility matures in December 2007 and has a
one-year extension feature, exercisable at our option. The
facility bears interest at the greater of prime or the federal
funds rate plus 0.50%, or at our option, LIBOR plus 0.50%. The
spread over LIBOR can vary from LIBOR plus 0.425% to LIBOR plus
1.25% based upon the rating of our Long-Term Unsecured Debt. The
facility contains an accordion feature that allows us to expand
the commitment up to $900 million at any time during the
life of the facility, subject to lenders providing additional
commitments. Under the agreement, we pay a facility fee of 0.15%
of the commitment, which can vary from 0.125% to 0.200% based
upon the ratings of our Long-Term Unsecured Debt.
The following table summarizes our revolving credit facility
borrowings under our line of credit (in thousands, except for
percentages):
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Total unsecured revolving credit facility
|
|
$ |
600,000 |
|
|
$ |
600,000 |
|
Borrowings outstanding at December 31
|
|
$ |
19,000 |
|
|
$ |
97,000 |
|
Outstanding letters of credit under this facility
|
|
$ |
13,983 |
|
|
$ |
1,050 |
|
Weighted average daily borrowings
|
|
$ |
81,317 |
|
|
$ |
231,354 |
|
Maximum borrowings outstanding during the period
|
|
$ |
375,000 |
|
|
$ |
511,500 |
|
Weighted average daily nominal interest rate
|
|
|
1.58 |
% |
|
|
1.95 |
% |
Weighted average daily effective interest rate
|
|
|
2.62 |
% |
|
|
2.55 |
% |
We also have a short-term unsecured borrowing agreement with
JPMorgan Chase Bank, which provides for maximum borrowings of
$100 million. The borrowings under the agreement bear
interest at an overnight rate agreed to at the time of borrowing
and ranged from 1.60% to 2.55% during 2004. There were no
borrowings outstanding under the agreement at December 31,
2004 and $6.8 million of borrowings outstanding under this
agreement at December 31, 2003.
In April 2004, we filed a shelf registration statement on
Form S-3 to register an additional $450 million in
unsecured debt securities. This registration statement was
declared effective in April 2004. During August 2004, the
Operating Trust issued $300 million in long-term unsecured
ten-year notes with net proceeds of $297.1 and a coupon rate of
5.6% and an effective interest rate of 5.8% from its shelf
registration statement. The proceeds were used to repay
outstanding balances on the Operating Trusts unsecured
credit facilities.
75
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The notes were issued pursuant to a supplemental indenture with
modified debt covenants, which are specific to these notes. The
primary change pertains to the leverage covenant, which limits
total debt to 65% of the market value of total assets as
defined, using a capitalization rate of 7.5% to value stabilized
operating assets. As of December 31, 2004, the Operating
Trust had $700 million available in shelf registered debt
securities which can be issued subject to our ability to affect
offerings on satisfactory terms based on prevailing market
conditions.
In March 2003, we filed a shelf registration statement on
Form S-3 to register an additional $335 million in
unsecured debt securities. During June 2003, we issued
$250 million of long-term unsecured senior notes due in
June 2008 for net proceeds of $247.2 million. These notes
bear interest at a coupon rate of 3.0% annually, with an
effective interest rate of 3.2%. The net proceeds were used to
repay outstanding balances on our unsecured credit facilities.
A summary of our Long-Term Unsecured Debt outstanding at
December 31, 2004 and 2003 follows (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective | |
|
Balance at | |
|
Balance at | |
|
Average | |
|
|
Coupon | |
|
Interest | |
|
December 31, | |
|
December 31, | |
|
Remaining Life | |
Type of Debt |
|
Rate(1) | |
|
Rate(2) | |
|
2004 | |
|
2003 | |
|
(Years) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term unsecured senior notes
|
|
|
6.2 |
% |
|
|
6.4 |
% |
|
$ |
2,019,607 |
|
|
$ |
1,771,167 |
|
|
|
5.3 |
|
Unsecured tax-exempt bonds
|
|
|
1.8 |
% |
|
|
2.1 |
% |
|
|
79,525 |
|
|
|
100,798 |
|
|
|
18.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/average
|
|
|
6.1 |
% |
|
|
6.2 |
% |
|
$ |
2,099,132 |
|
|
$ |
1,871,965 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents a fixed rate for the long-term unsecured notes and a
variable rate for the unsecured tax-exempt bonds. |
|
(2) |
Includes the effect of fair value hedges, loan cost amortization
and other ongoing fees and expenses, where applicable. |
The $2.1 billion of Long-Term Unsecured Debt generally have
semi-annual interest payments and either amortizing annual
principal payments or balloon payments due at maturity. The
unsecured tax-exempt bonds require semi-annual payments and are
due upon maturity with $22.4 million maturing in 2008 and
$57.1 million maturing in 2029. The notes are redeemable at
our option, in whole or in part, and the unsecured tax-exempt
bonds are redeemable at our option upon sale of the related
property. The redemption price is generally equal to the sum of
the principal amount of the notes being redeemed plus accrued
interest through the redemption date plus a standard make-whole
premium, if any.
Our mortgages payable generally feature either monthly interest
and principal payments or monthly interest-only payments with
balloon payments due at maturity (see Scheduled
Debt Maturities). A
76
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
summary of mortgages payable outstanding for the years ending
December 31, 2004 and 2003 follows (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance at(1) | |
|
|
|
|
| |
|
Effective | |
|
|
December 31, | |
|
December 31, | |
|
Interest | |
|
|
2004 | |
|
2003 | |
|
Rate(2) | |
|
|
| |
|
| |
|
| |
Secured floating rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt debt
|
|
$ |
508,923 |
|
|
$ |
317,351 |
|
|
|
2.0 |
% |
|
Construction loans
|
|
|
40,868 |
|
|
|
56,129 |
|
|
|
4.4 |
% |
|
Conventional mortgages
|
|
|
21,705 |
|
|
|
21,705 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Floating
|
|
|
571,496 |
|
|
|
395,185 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
Secured fixed rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional mortgages
|
|
|
1,439,558 |
|
|
|
1,511,277 |
|
|
|
6.5 |
% |
|
Other secured debt
|
|
|
20,451 |
|
|
|
21,163 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed
|
|
|
1,460,009 |
|
|
|
1,532,440 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding at end of period
|
|
$ |
2,031,505 |
|
|
$ |
1,927,625 |
|
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes a net fair market value adjustment recorded in
connection with the Smith Merger of $48.4 million and
$58.5 million at December 31, 2004 and 2003,
respectively. This amount is amortized into interest expense
over the life of the underlying debt. |
|
(2) |
Includes the effect of fair value hedges, credit enhancement
fees, the amortization of fair market value purchase adjustment,
and other related costs, where applicable. |
The change in mortgages payable during 2004 and 2003 consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
1,927,625 |
|
|
$ |
2,179,997 |
|
|
Issuance of new mortgages
|
|
|
51,656 |
|
|
|
76,017 |
|
|
Mortgage assumptions related to property acquisitions
|
|
|
113,585 |
|
|
|
55,362 |
|
|
Proceeds from construction loans
|
|
|
118,000 |
|
|
|
|
|
|
Regularly scheduled principal amortization
|
|
|
(11,512 |
) |
|
|
(11,934 |
) |
|
Prepayments, final maturities and other
|
|
|
(167,849 |
) |
|
|
(371,817 |
) |
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
2,031,505 |
|
|
$ |
1,927,625 |
|
|
|
|
|
|
|
|
77
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Scheduled Debt Maturities |
Approximate principal payments due during each of the next five
calendar years and thereafter, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Unsecured Debt | |
|
Mortgages Payable | |
|
|
|
|
| |
|
| |
|
|
|
|
Regularly | |
|
|
|
Regularly | |
|
|
|
|
|
|
Scheduled | |
|
Final | |
|
Scheduled | |
|
Final | |
|
|
|
|
Principal | |
|
Maturities | |
|
Principal | |
|
Maturities | |
|
|
|
|
Amortization | |
|
and Other | |
|
Amortization | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
31,250 |
|
|
$ |
220,000 |
|
|
$ |
11,804 |
|
|
$ |
50,689 |
|
|
$ |
313,743 |
|
2006
|
|
|
31,250 |
|
|
|
20,000 |
|
|
|
10,752 |
|
|
|
233,451 |
|
|
|
295,453 |
|
2007
|
|
|
31,250 |
|
|
|
355,000 |
|
|
|
11,352 |
|
|
|
144,920 |
|
|
|
542,522 |
|
2008
|
|
|
31,250 |
|
|
|
302,412 |
|
|
|
12,660 |
|
|
|
110,290 |
|
|
|
456,612 |
|
2009
|
|
|
51,250 |
|
|
|
31,027 |
|
|
|
10,272 |
|
|
|
362,070 |
|
|
|
454,619 |
|
Thereafter(1)
|
|
|
346,250 |
|
|
|
648,193 |
|
|
|
245,045 |
|
|
|
828,200 |
|
|
|
2,067,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
522,500 |
|
|
$ |
1,576,632 |
|
|
$ |
301,885 |
|
|
$ |
1,729,620 |
|
|
$ |
4,130,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The average annual principal payments due from 2010 to 2024 are
$117.9 million per year. |
The book value of total assets pledged as collateral for
mortgage loans and other obligations at both December 31,
2004 and 2003 is $3.8 billion. Our debt instruments
generally contain covenants common to the type of facility or
borrowing, including financial covenants establishing minimum
debt service coverage ratios and maximum leverage ratios. We
were in compliance with all financial covenants pertaining to
our debt instruments at December 31, 2004. See Note 10
for a summary of derivative financial instruments used in
connection with our debt instruments.
|
|
(6) |
Distributions to Unitholders |
The payment of distributions is subject to the discretion of the
Board and is dependent upon our strategy, financial condition
and operating results. At its December 2004 Board meeting, the
Board announced an anticipated increase in the annual
distribution from $1.72 to $1.73 per Common Unit.
78
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the cash distributions paid per
share on Common Units and Preferred Units during 2004, 2003 and
2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Common Units and A-1 Units(1)
|
|
$ |
2.72 |
|
|
$ |
1.71 |
|
|
$ |
1.70 |
|
Series A Preferred Units(2)
|
|
|
|
|
|
|
2.11 |
|
|
|
2.29 |
|
Series C Preferred Units(3)
|
|
|
|
|
|
|
|
|
|
|
1.38 |
|
Series D Preferred Units(4)
|
|
|
1.31 |
|
|
|
2.19 |
|
|
|
2.19 |
|
Series E Preferred Units(5)
|
|
|
2.09 |
|
|
|
2.09 |
|
|
|
0.70 |
|
Series F Preferred Units(5)
|
|
|
1.50 |
|
|
|
2.03 |
|
|
|
0.68 |
|
Series G Preferred Units(5)
|
|
|
2.16 |
|
|
|
2.16 |
|
|
|
0.72 |
|
Series H Preferred Units(6)
|
|
|
|
|
|
|
1.27 |
|
|
|
3.36 |
|
Series I Preferred Units(7)
|
|
|
7,660.00 |
|
|
|
7,660.00 |
|
|
|
7,660.00 |
|
Series J Preferred Units(8)
|
|
|
|
|
|
|
|
|
|
|
1.71 |
|
Series K Preferred Units(9)
|
|
|
2.55 |
|
|
|
3.38 |
|
|
|
3.36 |
|
Series L Preferred Units(10)
|
|
|
3.40 |
|
|
|
3.38 |
|
|
|
3.36 |
|
|
|
|
|
(1) |
Includes a $1.00 per unit special distribution issued to
our Common Unitholders in December 2004. |
|
|
(2) |
The Series A Preferred Units were called for redemption
during the fourth quarter of 2003; of the 2.9 million
Preferred Units outstanding, 2.8 million were converted to
Common Units and the remaining were redeemed. |
|
|
(3) |
The Series C Preferred Units were redeemed at liquidation
value, plus accrued and unpaid distributions, in August 2002. |
|
|
(4) |
The Series D Preferred Units were redeemed in August 2004. |
|
|
(5) |
In August 2002, the DownREIT Perpetual Preferred Units were
converted into Operating Trust Perpetual Preferred Units.
The Company redeemed the Series F Preferred Units in
September 2004, 520,000 of the Series E Preferred Units in
August 2004 and 400,000 of the Series E Preferred Units in
November 2004. |
|
|
(6) |
The Series H Preferred Units were converted into Common
Units in May 2003. |
|
|
(7) |
The Series I Preferred Units have a par value of $100,000. |
|
|
(8) |
The Series J Preferred Units were converted into Common
Units in July 2002. |
|
|
(9) |
The Series K Preferred Units were converted into Common
Units in September 2004. |
|
|
(10) |
The Series L Preferred Units were converted to Common Units
in December 2004. |
In connection with the Smith Merger, we issued approximately
25.5 million A-1 Common Units to former Smith Partnership
Unitholders. These units are redeemable at the option of the A-1
Common Unitholders. The Operating Trust must redeem the A-1
Common Units with cash or Archstone-Smith has the option to
redeem the A-1 Common Units with Common Shares. The A-1 Common
Unitholders aggregate interest in the Operating Trust was
approximately 10.9% at December 31, 2004.
During 2004 and 2003, Archstone-Smith issued 374,921 and
1,955,908 Common Units in exchange for real estate. In 2002,
Archstone-Smith issued 339,727 Class B Common Units as
partial consideration for a real estate acquisition. In April
2002, Archstone-Smith issued 149,319 unregistered Common Shares
in
79
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exchange for 149,319 Class B Common Units previously
issued. In August 2002, we converted 870,523 of DownREIT
operating units into A-1 Common Units in connection with the
merger with our DownREIT Operating Partnerships.
|
|
|
Units of Beneficial Interest |
Our Declaration of Trust authorizes us to issue 450,000,000
Units with a par value of $0.01 per unit. Our Declaration
of Trust allows us to issue Common Units, Preferred Units and
such other Units of beneficial interest as the Board may create
and authorize from time to time. The Board may classify or
reclassify any unissued units from time to time by setting or
changing the preferences, conversion rights, voting powers,
restrictions, limitations as to distributions, qualifications of
terms or conditions of redemption.
|
|
|
Preferred Unit Redemption and Conversions |
The Series A Preferred Units were called for redemption
during 2003. Of the 2.9 million Series A Preferred
Units outstanding, 2.8 million were converted to Common
Units and the remaining were redeemed. During May 2003, the
Series H Preferred Units were converted into Common Units.
In August 2004, the series D Preferred Units were redeemed
at liquidation value plus distributions for a total of
$47.6 million. In August and November 2004, 520,000 and
400,000 Series E Perpetual Preferred Units were redeemed at
liquidation value plus accrued dividends. In September 2004, the
Series F Perpetual Preferred Units were redeemed at
liquidation value plus accrued dividends. The Series K
Preferred Units were converted to Common Units in September 2004
and the Series L Preferred Units were converted to Common
Units in December 2004.
|
|
|
Common Unit Repurchase and Issuances |
During 2004, we repurchased and retired 3,516,700 Common Units
for an average price of $27.93 per share. In 2003, we
repurchased 614,100 Common Units for an average price of
$21.38 per share. During 2004, we issued 156,000 Common
Units in exchange for real estate.
A summary of our Convertible Preferred Units outstanding at
December 31, 2004 and 2003, including their significant
rights, preferences, and privileges follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
|
|
|
|
|
|
Dividend | |
|
December 31, | |
|
|
Redemption | |
|
Conversion | |
|
Liquidation | |
|
Rate Per | |
|
| |
Description |
|
Date | |
|
Ratio | |
|
value | |
|
Unit | |
|
2004 |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Series K Preferred Units; 0 Units issued and outstanding at
December 31, 2004 and 666,667 at December 31, 2003(1)
|
|
|
9/20/04 |
|
|
|
1.975 |
|
|
|
37.50 |
|
|
|
3.38 |
|
|
|
|
|
|
|
25,000 |
|
Series L Preferred Units; 0 Units issued and outstanding at
December 31, 2004 and 641,026 at December 31, 2003(2)
|
|
|
12/21/04 |
|
|
|
1.975 |
|
|
|
39.00 |
|
|
|
3.38 |
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Series K Preferred Units were converted into Common
Units in September 2004. |
|
(2) |
The Series L Preferred Units were converted into Common
Units in December 2004. |
80
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of our Perpetual Preferred Units outstanding at
December 31, 2004 and 2003, including their significant
rights, preferences, and privileges follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
|
|
|
|
Dividend | |
|
December 31, | |
|
|
Redemption | |
|
Liquidation | |
|
Rate Per | |
|
| |
Description |
|
Date(1) | |
|
Value | |
|
Unit | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Amounts in | |
|
|
|
|
|
|
|
|
Thousands) | |
Series D Preferred Units; 0 and 1,957,606 units issued
and outstanding at December 31, 2004 and 2003,
respectively(1)
|
|
|
08/06/04 |
|
|
|
25.00 |
|
|
$ |
2.19 |
|
|
$ |
|
|
|
$ |
48,940 |
|
Series E Preferred Units; 200,000 and 1,120,000 units
issued and outstanding at December 31, 2004 and 2003,
respectively(2)
|
|
|
02/04/05 |
|
|
|
25.00 |
|
|
|
2.09 |
|
|
|
4,929 |
|
|
|
27,123 |
|
Series F Preferred Units; 0 and 800,000 units issued
and outstanding at December 31, 2004 and 2003,
respectively(2)
|
|
|
09/27/04 |
|
|
|
25.00 |
|
|
|
2.03 |
|
|
|
|
|
|
|
19,464 |
|
Series G Preferred Units; 600,000 units issued and
outstanding at December 31, 2004 and 2003, respectively(2)
|
|
|
03/03/05 |
|
|
|
25.00 |
|
|
|
2.16 |
|
|
|
14,593 |
|
|
|
14,593 |
|
Series I Preferred Units; 500 units issued and
outstanding at December 31, 2004 and 2003, respectively(3)
|
|
|
02/01/28 |
|
|
|
100,000 |
|
|
|
7,660 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,522 |
|
|
$ |
160,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Series D Preferred Shares were redeemed in August 2004. |
|
(2) |
In August 2002, 3,000,000 DownREIT Perpetual Preferred Units
were converted into Operating Trust Perpetual Preferred
Units. The Company redeemed the Series F Preferred Units in
September 2004, 520,000 of the Series E Preferred Units in
August 2004 and 400,000 of the Series E Preferred Units in
November 2004. |
|
(3) |
Series I Preferred Units may be redeemed for cash at our
option, in whole or in part, at a redemption price equal to the
liquidation price per share, plus accrued and unpaid
distributions, if any, on or after the redemption dates
indicated. |
The holders of our Preferred Units do not have preemptive rights
over the holders of Common Units, but do have limited voting
rights under certain circumstances. The Preferred Units have no
stated maturity, are not subject to any sinking fund
requirements and we are not obligated to redeem or retire the
Units. Holders of the Preferred Units are entitled to receive
cumulative preferential cash distributions, when and as declared
and authorized by the Board, out of funds legally available for
the payment of distributions. All Preferred Unit distributions
are cumulative from date of original issue and all series of
Preferred Units rank equally as to distributions and liquidation
proceeds. All distributions due and payable on Preferred Units
have been accrued and paid as of the end of each fiscal year.
If six quarterly distributions payable (whether or not
consecutive) on any series or class of Preferred Units that are
of equal rank with respect to distributions and any distribution
of assets, shall not be paid in full, the number of Independent
Trustees shall be increased by two and the holders of all such
Preferred Units voting as a class regardless of series or class,
shall be entitled to elect the two additional Independent
Trustees. Whenever all distributions in arrears have been paid,
the right to elect the two additional Independent Trustees shall
cease and the terms of such Independent Trustees shall terminate.
|
|
|
Dividend Reinvestment and Share Purchase Plan |
Archstone-Smiths dividend reinvestment and share purchase
plan was designed and implemented to increase ownership in the
Company by private investors. Under the plan, holders of
Archstone-Smith Common Shares and Operating Trust A-1
Common Units have the ability to automatically reinvest their
cash dividends and distributions to purchase additional Common
Units. In October 2003, we announced that units issued under the
Dividend Reinvestment and Share Purchase Plan would be acquired
through open market
81
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchases or in negotiated transactions with third parties
pursuant to the automatic reinvestment of dividends or pursuant
to optional cash payments under the plan. As a result, Common
Shares acquired by investors under the plan are not currently
entitled to a discount.
In December of 2004, the Operating Trust issued one
Series M Preferred Unit in exchange for cash. This unit is
redeemable at the option of the Unit Holder and/or the Operating
Trust under certain circumstances. If the Operating Trust is
required to redeem the Series M Preferred Unit, the
redemption price will be paid in cash. If the holder of the
Series M Preferred Unit requests redemption of the
Series M Preferred Unit, the Operating Trust has the option
of redeeming the Series M Preferred Unit with cash or with
Common Shares. The redemption value under such circumstances is
based on the performance of the related real estate asset, as
outlined in the contribution agreement. The Series M
Preferred Unit is entitled to a dividend equivalent to the same
dividend paid on 263 Common Shares. The holder of the
Series M Preferred Unit does not have preemptive rights
over the holders of Common Shares and does not have any voting
right except as required by law. The Series M Preferred
Unit has no stated maturity and is not subject to any sinking
fund requirements.
Our long-term incentive plan was approved in 1997, and was
modified in connection with the Smith Merger. There have been
five types of awards under the plan: (i) options with a DEU
feature (only awarded prior to 2000); (ii) options without
the DEU feature (generally awarded after 1999);
(iii) restricted Common Share unit awards with a DEU
feature; (iv) employee share purchase program with matching
options without the DEU feature, granted only in 1997 and 1998;
and (v) Common Units issued to certain named executives
under our Special Long-Term Incentive Plan.
No more than 20 million share or option awards in the
aggregate may be granted under the plan and no individual may be
awarded more than 1.0 million share or option awards in any
one-year period. The plan has a 10-year term. As of
December 31, 2004, Archstone-Smith had approximately
8,232,000 shares available for future grants. Beginning in
2004, the Board voted to eliminate regular option awards to
officers with the title of Senior Vice President or above.
|
|
|
Share Options and Trustee Options |
The exercise price of each employee option granted is equal to
the fair market value at the close of business on the day
immediately preceding the date of grant. The options awarded
through mid-2001 generally vest at a rate of 25% per year;
options granted after mid-2001 generally vest at the rate of
331/3%
a year.
Archstone-Smith has authorized 400,000 Common Units for issuance
to their Independent Trustees under the equity plan for
Independent Trustees. The exercise price of outside trustee
options is equal to the average of the high and low prices on
the date of grant. All options granted to Independent Trustees
before 1999 have been exercised or cancelled. The options issued
to Independent Trustees between 1999 and 2001 have a DEU
feature, a 10-year term and vest over a four-year period.
Beginning in 2002 options are no longer issued to Independent
Trustees.
During 1997, as part of the employee share purchase plan,
certain officers and other employees purchased Common Shares of
Archstone-Smith. The Company financed 95% of the total purchase
price by issuing notes representing approximately
$17.1 million. Loans made to employees in connection with
the employee share purchase plan are recourse loans and the
associated receivable is recorded as a reduction of
shareholders/ unitholders equity. As of
December 31, 2004, the aggregate outstanding balances on
these notes were approximately $917,000.
82
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of all options outstanding at December 31, 2004
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Prices | |
|
|
|
Weighted-Average | |
|
|
Number of | |
|
| |
|
Expiration | |
|
Remaining | |
|
|
Options | |
|
Range | |
|
Average | |
|
Date | |
|
Contractual Life | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Matching options under the 1997 employee unit purchase program
|
|
|
72,086 |
|
|
$ |
21.49-$21.86 |
|
|
$ |
21.50 |
|
|
|
2007 |
|
|
|
2.69 years |
|
Options with DEUs
|
|
|
862,569 |
|
|
|
19.00- 22.66 |
|
|
|
20.48 |
|
|
|
2007-2009 |
|
|
|
4.07 years |
|
Options without DEUs
|
|
|
2,818,401 |
|
|
|
21.34- 29.33 |
|
|
|
24.45 |
|
|
|
2007-2014 |
|
|
|
7.47 years |
|
Independent Trustees
|
|
|
61,250 |
|
|
|
22.56- 23.95 |
|
|
|
23.14 |
|
|
|
2009-2011 |
|
|
|
5.51 years |
|
Exchanged options
|
|
|
66,920 |
|
|
|
14.68- 22.58 |
|
|
|
19.93 |
|
|
|
2007-2011 |
|
|
|
5.47 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,881,226 |
|
|
$ |
14.68-$29.33 |
|
|
$ |
23.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of Archstone-Smiths option plans
as of December 31, 2004, 2003 and 2002, and changes during
the years ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Number of | |
|
|
Number of | |
|
Average | |
|
Options | |
|
|
Options | |
|
Exercise Price | |
|
Exercisable | |
|
|
| |
|
| |
|
| |
Balance/ Average at December 31, 2001
|
|
|
8,107,628 |
|
|
$ |
21.33 |
|
|
|
5,131,390 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,680,143 |
|
|
|
24.15 |
|
|
|
|
|
|
Exercised
|
|
|
(1,210,890 |
) |
|
|
26.28 |
|
|
|
|
|
|
Forfeited
|
|
|
(340,519 |
) |
|
|
23.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance/ Average at December 31, 2002
|
|
|
9,236,362 |
|
|
$ |
22.44 |
|
|
|
5,314,210 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
15,823 |
|
|
|
22.42 |
|
|
|
|
|
|
Exercised
|
|
|
(2,101,605 |
) |
|
|
19.58 |
|
|
|
|
|
|
Forfeited
|
|
|
(762,838 |
) |
|
|
24.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance/ Average at December 31, 2003
|
|
|
6,387,742 |
|
|
$ |
23.15 |
|
|
|
4,546,725 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
647,825 |
|
|
|
26.83 |
|
|
|
|
|
|
Exercised
|
|
|
(3,002,193 |
) |
|
|
22.85 |
|
|
|
|
|
|
Forfeited
|
|
|
(152,148 |
) |
|
|
25.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance/ Average at December 31, 2004
|
|
|
3,881,226 |
|
|
$ |
23.41 |
|
|
|
2,891,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Share Unit Awards |
Restricted Share Unit awards are granted at the market value of
the underlying Common Units on the date of grant. To compute the
total compensation expense to be recognized, the fair value of
each share on the grant date is multiplied by the number of
units granted. We then recognize this stock-based employee
compensation expense over the vesting period, which ranges from
two to four years. The total expense recognized in connection
with these awards, including the DEUs for the years ending
December 31, 2004, December 31, 2003 and
December 31, 2002 was $5.7 million, $5.6 million,
and $4.6 million, respectively.
All RSU grants have a DEU feature. During 2004, 2003 and 2002
Archstone-Smith awarded 299,682, 0 and 341,048 RSUs,
respectively, to certain employees under the long-term incentive
plan, of which 50,763 have been forfeited prior to vesting. A
total of 14,504 RSUs with a DEU feature were awarded to trustees
under the equity plan for Independent Trustees, none of which
has been forfeited. Each RSU provides the holder with one Common
Share upon settlement. The RSUs and related DEU feature vest at
25%-33.33% per
83
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
year over a three or four-year period. We recognize the value of
the awards and the related DEUs as compensation expense over the
vesting period.
|
|
|
Dividend Equivalent Units |
Under the modified long-term incentive plan, participants who
are awarded RSUs may be credited with DEUs equal to the amount
of dividends paid on Common Units with respect to such awards.
The DEUs are awarded annually at the end of each year and vest
under substantially the same terms as the underlying share
options or RSUs.
DEUs credited in relation to options are calculated by taking
the average number of options held at each record date and
multiplying by the difference between the average annual
dividend yield on Common Units and the average dividend yield
for the Standard & Poors 500 Stock Index. DEUs
credited in relation to RSUs are calculated by taking the
average number of RSUs held at each record date and multiplying
by the average annual dividend yield on Common Units. DEUs
credited in relation to existing DEUs are calculated by taking
the number of DEUs at December 31 and multiplying by the
average annual dividend yield on Common Units.
As of December 31, 2004, there were approximately 280,778
DEUs outstanding awarded to 86 holders of options and RSUs. The
outstanding DEUs were valued at $10.8 million on
December 31, 2004 based upon market price of the Common
Units on that date. We recognize the value of the DEUs awarded
as compensation expense over the vesting period. The matching
options granted in connection with the 1997 employee purchase
program and all of the employee options granted after 1999
(including the converted Smith Residential options) do not have
a DEU feature.
|
|
|
401(k) Plan and Nonqualified Deferred Compensation
Plan |
In December 1997, the Archstone-Smith Board established a 401(k)
plan and a nonqualified savings plan, both of which became
effective on January 1, 1998. The 401(k) plan provides for
matching employer contributions of fifty cents for every dollar
contributed by the employee, up to 6% of the employees
annual contribution. Contributions by employees to the 401(k)
plan are subject to federal limitations of $12,000 during 2004.
The matching employer contributions are made in Common Units,
which vest between years of service at 20% per year. The Smith
Residential nonqualified deferred compensation plan and the
Independent Trustees deferred fee plan were merged into our
existing nonqualified savings plan to form a new on-going
nonqualified deferred compensation plan on January 1, 2002.
Generally, the deferred compensation plan permits only deferrals
of compensation by eligible employees and non-employee trustees.
No employer contributions are currently being made to that plan.
Amounts deferred under the deferred compensation plan are
invested among a variety of investments as directed by the
participants, and are generally deferred until termination of
employment or service as a trustee.
|
|
|
Deferral of Fees by Non-Employee Trustees |
Pursuant to the terms of the nonqualified deferred compensation
plan, each non-employee member of our Board has the opportunity
to defer receipt of all or a portion of the service fees they
otherwise would have been paid in cash. If a participant elects
to have their fees deferred, the fees accrue in the form of
phantom Units equal to the number of Common Units that could
have been purchased on the date the fee was credited. Dividends
are calculated on the phantom Units and additional phantom Units
are credited. Distribution of phantom Units may be deferred to a
later date. Upon settlement, phantom Units convert into Common
Units on a 1-to-1 basis. Alternatively, the Trustee can elect to
have his or her fees deferred and invested in one or more of the
investment funds that are otherwise available under the deferred
compensation plan. Upon settlement such investments are paid out
in cash.
84
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Special Long-Term Incentive Plan |
During December 2001, the Executive Compensation Committee
approved a Special Long-Term Incentive Plan whereby certain
named executive officers would be eligible to earn a number of
Common Shares equal to the number of performance units that vest
at the end of a three-year performance period from
January 1, 2001 to December 31, 2004. The number of
performance units that could vest ranged from zero to 100%
depending upon our annual compounded total shareholder return at
the end of the three-year performance period and our annual
compounded total shareholder return compared to the NAREIT
Apartment Index based on percentile rankings. We accounted for
the Special Long-Term Incentive Plan as a variable plan as the
number of shares to be ultimately issued was not known until the
end of the performance period. Estimates of the ultimate
compensation costs were recorded to expense on a quarterly basis
over the performance period and adjusted as necessary.
At the end of the three-year performance period, the number of
performance units that vested were exchanged for an equal number
of Common Shares. All performance units that did not vest at the
end of the three-year performance period were cancelled. As a
result of Archstone-Smiths actual performance over this
period, 205,600 Common Shares were issued to these named
executive officers during the first quarter of 2005.
|
|
(9) |
Financial Instruments and Hedging Activities |
|
|
|
Fair Value of Financial Instruments |
At December 31, 2004 and 2003, the fair values of cash and
cash equivalents, restricted cash held in a tax-deferred
exchange escrow accounts, receivables and accounts payable
approximated their carrying values because of the short-term
nature of these instruments. The estimated fair values of other
financial instruments subject to fair value disclosures were
determined based on available market information and valuation
methodologies believed to be appropriate for these purposes.
Considerable judgment and a high degree of subjectivity are
involved in developing these estimates and, therefore, are not
necessarily indicative of the actual amounts that we could
realize upon disposition. The following table summarizes these
financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 | |
|
Balance at December 31, 2003 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Estimated | |
|
Carrying | |
|
Estimated | |
|
|
Amounts | |
|
Fair Value | |
|
Amounts | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured credit facilities
|
|
$ |
19,000 |
|
|
$ |
19,000 |
|
|
$ |
103,790 |
|
|
$ |
103,790 |
|
|
Long-Term Unsecured Debt
|
|
|
2,099,132 |
|
|
|
2,262,778 |
|
|
|
1,871,695 |
|
|
|
2,043,289 |
|
|
Mortgages payable
|
|
|
2,031,505 |
|
|
|
2,093,436 |
|
|
|
1,927,625 |
|
|
|
2,032,872 |
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$ |
10,209 |
|
|
$ |
10,209 |
|
|
$ |
2,765 |
|
|
$ |
2,765 |
|
|
Interest rate caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward sales agreements
|
|
$ |
|
|
|
$ |
|
|
|
$ |
250 |
|
|
$ |
250 |
|
All publicly traded equity securities are classified as
available for sale securities and carried at fair
value, with unrealized gains and losses reported as a separate
component of unitholders equity. As of December 31,
2004 and 2003, our investments in publicly traded equity
securities included in other assets were $19.0 million and
$144.7 million, respectively. Private investments, for
which we do not have the ability to exercise significant
influence, are accounted for at cost. Declines in the value of
public and private investments that management determines are
other than temporary, are recorded as a provision for possible
loss on investments. Our evaluation of the carrying value of
these investments is primarily based upon a
85
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
regular review of market valuations (if available), each
companys operating performance and assumptions underlying
cash flow forecasts. In addition, management considers events
and circumstances that may signal the impairment of an
investment.
|
|
|
Interest Rate Hedging Activities |
We are exposed to the impact of interest rate changes and will
occasionally utilize interest rate swaps and interest rate caps
as hedges with the objective of lowering our overall borrowing
costs. These derivatives are designated as either cash flow or
fair value hedges. We do not use these derivatives for trading
or other speculative purposes. Further, as a matter of policy,
we only enter into contracts with major financial institutions
based upon their credit ratings and other factors. When viewed
in conjunction with the underlying and offsetting exposure that
the derivatives are designed to hedge, we have not, nor do we
expect to sustain a material loss from the use of these hedging
instruments.
We formally assess, both at inception of the hedge and on an
ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged
item. We measure hedge effectiveness by comparing the changes in
the fair value or cash flows of the derivative instrument with
the changes in the fair value or cash flows of the hedged item.
We assess effectiveness of purchased interest rate caps based on
overall changes in the fair value of the caps. If a derivative
ceases to be a highly effective hedge, we discontinue hedge
accounting prospectively.
To determine the fair values of derivative and other financial
instruments, we use a variety of methods and assumptions that
are based on market value conditions and risks existing at each
balance sheet date. These methods and assumptions include
standard market conventions and techniques such as discounted
cash flow analysis, option pricing models, replacement cost and
termination cost. All methods of assessing fair value result in
a general approximation of value, and therefore, are not
necessarily indicative of the actual amounts that we could
realize upon disposition.
During the years ended December 31, 2004, 2003 and 2002 we
recorded an increase/ (decrease) to interest expense of $33,000,
$101,000 and $(312,000), for hedge ineffectiveness caused by a
difference between the interest rate index on a portion of our
outstanding variable rate debt and the underlying index of the
associated interest rate swap. We pursue hedging strategies that
we expect will result in the lowest overall borrowing costs and
least degree of earnings volatility possible under the new
accounting standards.
86
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the notional amount, carrying
value and estimated fair value of our derivative financial
instruments used to hedge interest rates, as of
December 31, 2004 (dollar amounts in thousands). The
notional amount represents the aggregate amount of a particular
security that is currently hedged at one time, but does not
represent exposure to credit, interest rate or market risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying and | |
|
|
Notional | |
|
Maturity | |
|
Estimated Fair | |
|
|
Amount | |
|
Date Range | |
|
Value | |
|
|
| |
|
| |
|
| |
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$ |
109,008 |
|
|
|
2005-2007 |
|
|
$ |
8 |
|
|
Interest rate swaps
|
|
|
150,000 |
|
|
|
2006 |
|
|
|
(3,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
$ |
259,008 |
|
|
|
2005-2007 |
|
|
$ |
(3,548 |
) |
|
|
|
|
|
|
|
|
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$ |
75,055 |
|
|
|
2008 |
|
|
$ |
4,470 |
|
|
Total rate of return swaps
|
|
|
77,006 |
|
|
|
2006-2007 |
|
|
|
8,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges
|
|
$ |
152,061 |
|
|
|
2005-2008 |
|
|
$ |
13,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedges
|
|
$ |
411,069 |
|
|
|
2005-2008 |
|
|
$ |
9,515 |
|
|
|
|
|
|
|
|
|
|
|
During 2004, we entered into interest rate swap transactions to
mitigate the risk of changes in the interest-related cash
outflows on a forecasted issuance of long-term unsecured debt.
At inception, these swap transactions had an aggregate notional
amount of $144 million and a fair value of zero. The
long-term unsecured debt these swap transactions related to was
issued in August 2004. The hedge was terminated when the debt
was issued. The fair value of the cash flow hedge upon
termination was a liability of approximately $2.5 million.
This amount was deferred in accumulated other comprehensive
income and will be reclassified out of accumulated other
comprehensive income as additional interest expense as the
hedged forecasted interest payments occur.
|
|
|
Equity Securities Hedging Activities |
We are exposed to price risk associated with changes in the fair
value of certain equity securities. During 2003, we entered into
forward sale agreements with an aggregate notional amount, which
represents the fair value of the underlying marketable
securities, of approximately $128.5 million and an
aggregate fair value of the forward sale agreements of
approximately $486,000, to protect against a reduction in the
fair value of these securities. We designated this forward sale
as a fair value hedge.
During 2004, we settled all of the forward sales agreements for
approximately 2.8 million shares, and sold
308,200 shares of marketable securities which were not
subject to forward sales agreements, resulting in an aggregate
gain of approximately $24.9 million. The total net proceeds
from the sale were $143.0 million, with the marketable
securities basis determined using the average costs of the
securities. The fair value of forward sales agreements at
December 31, 2004 and 2003 were $0 and $250,462,
respectively.
87
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(10) |
Selected Quarterly Financial Data |
Selected quarterly financial data (in thousands, except per unit
amounts) for 2004 and 2003 is summarized below. The sum of the
quarterly earnings per Common Unit amounts may not equal the
annual earnings per Common Unit amounts due primarily to changes
in the number of Common Units outstanding from quarter to
quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Year Ended | |
|
|
3-31(1) | |
|
6-30(1) | |
|
9-30(1) | |
|
12-31(1) | |
|
12-31(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
204,859 |
|
|
$ |
215,013 |
|
|
$ |
222,484 |
|
|
$ |
230,973 |
|
|
$ |
873,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
37,325 |
|
|
|
38,826 |
|
|
|
28,814 |
|
|
|
26,832 |
|
|
|
131,797 |
|
|
Income from unconsolidated entities
|
|
|
5,276 |
|
|
|
7,354 |
|
|
|
5,485 |
|
|
|
(213 |
) |
|
|
17,902 |
|
|
Other non-operating income
|
|
|
10,510 |
|
|
|
9,951 |
|
|
|
7,701 |
|
|
|
|
|
|
|
28,162 |
|
|
Less minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible operating partnership units
|
|
|
(352 |
) |
|
|
|
|
|
|
(108 |
) |
|
|
|
|
|
|
(460 |
) |
|
Plus: net earnings from discontinued operations
|
|
|
60,499 |
|
|
|
34,940 |
|
|
|
117,515 |
|
|
|
221,348 |
|
|
|
434,302 |
|
|
Less Preferred Share distributions
|
|
|
4,447 |
|
|
|
4,459 |
|
|
|
5,706 |
|
|
|
1,642 |
|
|
|
16,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Common Units Basic
|
|
$ |
109,515 |
|
|
$ |
86,612 |
|
|
$ |
153,917 |
|
|
$ |
246,325 |
|
|
$ |
596,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per Common Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.50 |
|
|
$ |
0.39 |
|
|
$ |
0.70 |
|
|
$ |
1.12 |
|
|
$ |
2.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.49 |
|
|
$ |
0.39 |
|
|
$ |
0.70 |
|
|
$ |
1.11 |
|
|
$ |
2.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
193,362 |
|
|
$ |
194,443 |
|
|
$ |
196,683 |
|
|
$ |
199,184 |
|
|
$ |
783,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
33,889 |
|
|
|
16,330 |
|
|
|
33,811 |
|
|
|
32,902 |
|
|
|
116,932 |
|
|
Income from unconsolidated entities
|
|
|
455 |
|
|
|
(1,161 |
) |
|
|
1,714 |
|
|
|
4,737 |
|
|
|
5,745 |
|
|
Less minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible operating partnership units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus net earnings from discontinued operations
|
|
|
63,442 |
|
|
|
59,316 |
|
|
|
142,192 |
|
|
|
106,564 |
|
|
|
371,514 |
|
|
Less Preferred Unit distributions
|
|
|
8,358 |
|
|
|
7,251 |
|
|
|
6,128 |
|
|
|
4,416 |
|
|
|
26,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Common Units Basic
|
|
$ |
89,428 |
|
|
$ |
67,234 |
|
|
$ |
171,589 |
|
|
$ |
139,787 |
|
|
$ |
468,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.43 |
|
|
$ |
0.32 |
|
|
$ |
0.80 |
|
|
$ |
0.64 |
|
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.43 |
|
|
$ |
0.32 |
|
|
$ |
0.79 |
|
|
$ |
0.63 |
|
|
$ |
2.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net earnings from discontinued operations have been reclassified
for all periods presented. |
We define our garden communities and high-rise properties each
as individual operating segments. We have determined that each
of our garden communities and each of our high-rise properties
have similar
88
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
economic characteristics and also meet the other GAAP criteria,
which permit the garden communities and high-rise properties to
be aggregated into two reportable segments. Additionally, we
have defined the activity from Ameriton as an individual
operating segment as its primary focus is the opportunistic
acquisition, development and eventual disposition of real estate
with a short term investment horizon. NOI is defined as rental
revenues less rental expenses and real estate taxes. We rely on
NOI for purposes of making decisions about resource allocations
and assessing segment performance. We also believe NOI is a
valuable means of comparing year-to-year property performance.
Following are reconciliations, which exclude the amounts
classified as discontinued operations, of each reportable
segments (i) revenues to consolidated revenues;
(ii) NOI to consolidated earnings from operations; and
(iii) assets to consolidated assets, for the periods
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Reportable apartment communities segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
$ |
421,196 |
|
|
$ |
421,259 |
|
|
$ |
429,556 |
|
|
|
High-rise properties
|
|
|
255,279 |
|
|
|
254,151 |
|
|
|
253,229 |
|
|
Non Same-Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
105,075 |
|
|
|
44,109 |
|
|
|
28,982 |
|
|
|
High-rise properties
|
|
|
47,794 |
|
|
|
30,489 |
|
|
|
20,265 |
|
|
|
Ameriton(1)
|
|
|
21,501 |
|
|
|
11,053 |
|
|
|
7,742 |
|
Other non-reportable operating segment revenues
|
|
|
3,276 |
|
|
|
3,277 |
|
|
|
5,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment and consolidated revenues
|
|
$ |
854,121 |
|
|
$ |
764,338 |
|
|
$ |
744,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Reportable apartment communities segment NOI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
$ |
278,638 |
|
|
$ |
284,819 |
|
|
$ |
290,709 |
|
|
|
High-rise properties
|
|
|
161,066 |
|
|
|
161,922 |
|
|
|
159,890 |
|
|
Non Same-Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
66,573 |
|
|
|
30,271 |
|
|
|
17,756 |
|
|
|
High-rise properties
|
|
|
33,129 |
|
|
|
21,150 |
|
|
|
13,332 |
|
|
|
Ameriton(1)
|
|
|
10,259 |
|
|
|
6,133 |
|
|
|
3,904 |
|
Other non-reportable operating segment NOI
|
|
|
2,807 |
|
|
|
2,614 |
|
|
|
3,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment NOI
|
|
|
552,472 |
|
|
|
506,909 |
|
|
|
489,335 |
|
|
|
|
|
|
|
|
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
19,208 |
|
|
|
19,334 |
|
|
|
9,462 |
|
|
|
Depreciation on real estate investments
|
|
|
(203,183 |
) |
|
|
(162,723 |
) |
|
|
(148,588 |
) |
|
|
Interest expense
|
|
|
(175,249 |
) |
|
|
(160,871 |
) |
|
|
(149,538 |
) |
|
|
General and administrative expenses
|
|
|
(55,479 |
) |
|
|
(49,838 |
) |
|
|
(45,710 |
) |
|
|
Other expenses
|
|
|
(5,972 |
) |
|
|
(35,879 |
) |
|
|
(17,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated earnings from operations
|
|
$ |
131,797 |
|
|
$ |
116,932 |
|
|
$ |
137,947 |
|
|
|
|
|
|
|
|
|
|
|
89
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(1) |
While rental revenue and NOI are the primary measures we use to
evaluate the performance of our assets, management also utilizes
gains from the disposition of real estate when evaluating the
performance of Ameriton as its primary focus is the
opportunistic acquisition, development and eventual disposition
of real estate with a short term investment horizon. During
2004, 2003 and 2002, pre-tax gains from the disposition of
Ameriton real estate were $65.1 million, $42.7 million
and $30.7 million, respectively. These gains are classified
within discontinued operations. Ameriton assets are excluded
from our Same-Store population as they are acquired or developed
to achieve short-term opportunistic gains, and therefore, the
average holding period is typically much shorter than the
holding period of assets operated by the REIT. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
| |
|
|
|
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
|
|
Reportable operating communities segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
$ |
3,021,343 |
|
|
$ |
3,080,488 |
|
|
|
|
|
|
|
High-rise properties
|
|
|
2,521,725 |
|
|
|
2,547,861 |
|
|
|
|
|
|
Non Same-Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden communities
|
|
|
1,602,955 |
|
|
|
1,224,675 |
|
|
|
|
|
|
|
High-rise properties
|
|
|
548,956 |
|
|
|
817,129 |
|
|
|
|
|
|
|
Ameriton
|
|
|
434,946 |
|
|
|
472,743 |
|
|
|
|
|
Other non-reportable operating segment assets
|
|
|
82,537 |
|
|
|
57,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
8,212,462 |
|
|
|
8,200,856 |
|
|
|
|
|
|
|
|
Real estate held for sale
|
|
|
245,034 |
|
|
|
149,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
8,457,496 |
|
|
|
8,350,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated entities
|
|
|
111,481 |
|
|
|
86,367 |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
203,255 |
|
|
|
5,230 |
|
|
|
|
|
|
|
Restricted cash in tax-deferred exchange escrow
|
|
|
120,095 |
|
|
|
180,920 |
|
|
|
|
|
|
|
Other assets
|
|
|
173,717 |
|
|
|
298,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$ |
9,066,044 |
|
|
$ |
8,921,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for garden communities included in
continuing operations were $48.8 million and
$31.9 million for the years ended December 31, 2004
and 2003, respectively. Total capital expenditures for high-rise
properties included in continuing operations were
$34.5 million and $30.2 million for the years ended
December 31, 2004 and 2003, respectively. Total capital
expenditures for Ameriton properties included in continuing
operations were $1.0 million and $1.9 million for the
years ended December 31, 2004 and 2003, respectively.
These consolidated financial statements have been presented as
if the Company were a partnership for all periods presented. For
income tax purposes, the Company was subject to regulations
under the Internal Revenue Code pertaining to REITs through
October 31, 2001 and to partnerships subsequent to that
date. In either case, as a REIT or a partnership, our income is
not generally subject to federal income taxes and no provision
for income taxes is included in the accompanying Consolidated
Statements of Earnings.
90
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a partnership, we make distributions to our partners and
allocate our taxable income to our partners. The major portion
of distributions and income are paid/ allocated to
Archstone-Smith Trust with the remainder paid/ allocated to
third party unitholders.
The following table reconciles net earnings to taxable income
subject to distribution requirement for the years ended
December 31(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(estimated) | |
GAAP net earnings
|
|
$ |
612,623 |
|
|
$ |
494,191 |
|
|
$ |
356,725 |
|
Book to tax differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of CES(1)
|
|
|
|
|
|
|
|
|
|
|
(43,623 |
) |
|
Depreciation and amortization(2)
|
|
|
9,971 |
|
|
|
(1,513 |
) |
|
|
(22,348 |
) |
|
Gain or loss from capital transactions(3)
|
|
|
(67,609 |
) |
|
|
(124,390 |
) |
|
|
(25,685 |
) |
|
Deferred compensation and gain contingencies
|
|
|
3,177 |
|
|
|
859 |
|
|
|
17,323 |
|
|
Merger expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(9,254 |
) |
|
|
11,704 |
|
|
|
3,400 |
|
|
|
|
|
|
|
|
|
|
|
Taxable income, including capital gains
|
|
$ |
548,908 |
|
|
$ |
380,851 |
|
|
$ |
285,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In December 2002, CES was sold to a third party. See Note 4
for details. |
|
(2) |
We use accelerated depreciable lives for tax purposes. This
change resulted in higher depreciation expense on newly acquired
assets for tax purposes relative to GAAP. This was partially
offset by the Smith Merger in 2001 as GAAP depreciation expense
for the Smith assets was based on fair value and tax
depreciation was based on a lower historical tax basis. |
Distributions have been made as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Distributions to Archstone-Smith Trust
|
|
$ |
545,586 |
|
|
$ |
340,819 |
|
|
$ |
334,316 |
|
Distributions to unitholders
|
|
|
68,311 |
|
|
|
47,489 |
|
|
|
45,165 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Distributions
|
|
$ |
613,897 |
|
|
$ |
388,308 |
|
|
$ |
379,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes distribution of all ordinary income and capital gains. |
The following table summarizes the taxability of our
distributions for the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Ordinary income
|
|
|
46 |
% |
|
|
45 |
% |
|
|
78 |
% |
Capital gains(1)
|
|
|
54 |
% |
|
|
55 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes 22.8%, 6.2% and 22.0% of unrecaptured section 1250
gains in 2004, 2003, and 2002, respectively. |
91
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a taxable REIT subsidiary, Ameriton is subject to state and
federal income taxes. Income tax expense consists of the
following for the years ended December 31, 2004, 2003, and
2002 which is included in either other expense or discontinued
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
20,119 |
|
|
$ |
16,645 |
|
|
$ |
11,046 |
|
Deferred
|
|
|
(1,314 |
) |
|
|
(873 |
) |
|
|
1,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,805 |
|
|
|
15,772 |
|
|
|
12,421 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 35% to pretax
income as a result of the following for the years ended
December 31, 2004, 2003, and 2002 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Computed expected tax expense
|
|
$ |
17,801 |
|
|
$ |
15,016 |
|
|
$ |
11,238 |
|
Increase in income taxes resulting from state taxes and other
|
|
|
1,004 |
|
|
|
756 |
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,805 |
|
|
|
15,772 |
|
|
|
12,421 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the estimated net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the
corresponding amounts for income tax purposes. Ameritons
deferred tax assets and liabilities at December 31, 2004
and 2003 are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated real estate entities
|
|
$ |
|
|
|
$ |
476 |
|
|
Deferred compensation
|
|
|
2,920 |
|
|
|
22 |
|
|
Reserves
|
|
|
378 |
|
|
|
524 |
|
|
Other
|
|
|
125 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
3,423 |
|
|
|
1,110 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Real estate, principally due to depreciation
|
|
|
351 |
|
|
|
1,517 |
|
|
Earnings from unconsolidated real estate entities
|
|
|
2,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
2,515 |
|
|
|
1,517 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$ |
908 |
|
|
$ |
(407 |
) |
|
|
|
|
|
|
|
|
|
(13) |
Commitments and Contingencies |
At December 31, 2004 we had eight non-cancelable ground
leases for certain apartment communities and buildings that
expire between 2042 and 2095. Each ground lease generally
provides for a fixed annual rental
92
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
payment plus additional rental payments based on the
properties operating results. Additionally, we lease
certain office space under non-cancelable operating leases with
fixed annual rental payments.
The future minimum lease payments payable under non-cancelable
leases are as follows at December 31, 2004 (in thousands):
|
|
|
|
|
|
2005
|
|
$ |
4,117 |
|
2006
|
|
|
4,128 |
|
2007
|
|
|
4,167 |
|
2008
|
|
|
4,179 |
|
2009
|
|
|
4,220 |
|
Thereafter (2010-2095)
|
|
|
344,095 |
|
|
|
|
|
|
Total
|
|
$ |
364,906 |
|
|
|
|
|
See Note 2 for real estate related commitments.
|
|
|
Guarantees and Indemnifications |
We have extended performance bond guarantees relating to
contracts entered into by SMC, which are customary to the type
of business in which these entities engage. As of
December 31, 2004, $1.3 million of these performance
bond guarantees were still outstanding, based upon information
provided by these companies. The Operating Trust, our
subsidiaries and investees have not been required to perform on
these guarantees, nor do we anticipate being required to perform
on such guarantees. Since we believe that our risk of loss under
these contingencies is remote, no accrual for potential loss has
been made in the accompanying financial statements. There are
recourse provisions available to us to recover any potential
future payments from the new owners of SMC.
Investee third-party debt consists principally of mortgage notes
payable. Generally, mortgages on real estate assets owned by our
unconsolidated investees are secured by the underlying
properties. We generally do not guarantee third party debt
incurred by our unconsolidated investees; however, the investees
and/or Archstone-Smith are occasionally required to guarantee
the mortgages along with all other venture partners. As of
December 31, 2004, we have not been required to perform
under any guarantees provided to our joint ventures.
As part of the Smith Merger, we are required to indemnify the
former Smith Partnership unitholders for any personal income tax
expense resulting from the sale of high-rise properties
identified in the shareholders agreement between
Archstone-Smith, the Operating Trust, Robert H. Smith and Robert
P. Kogod until October 31, 2021.
|
|
|
Litigation and Contingencies |
We are subject to various claims in connection with moisture
infiltration and resulting mold issues at certain high-rise
properties in Southeast Florida. These claims generally allege
that water infiltration and resulting mold contamination
resulted in the claimants having personal injuries and/or
property damage. Although certain of these claims continue to be
at various stages of litigation, with respect to the majority of
these claims, we have either settled the claims and/or we have
been dismissed from the lawsuits that had been filed. With
respect to the lawsuits that have not been resolved, we continue
to defend these claims in the normal course of litigation.
We have recorded accruals for moisture infiltration and
resulting mold issues. These accruals represent
managements best estimate of the probable and reasonably
estimable costs and are based, in part, on the
93
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settlements reached with the various claimants, estimates
obtained from third-party contractors and actual costs incurred
to date. It is possible that these estimates could increase or
decrease as additional information becomes available.
We are aggressively pursuing recovery of a significant portion
of these costs from our insurance carriers. We are in litigation
with our insurance providers, and therefore we have not recorded
an estimate for future insurance recoveries associated with
moisture infiltration and resulting mold. In addition, we will
continue to pursue potential recoveries from third parties whom
we believe bear responsibility for a considerable portion of the
costs we have incurred. We cannot make assurances that we will
obtain these recoveries or that our ultimate liability
associated with these claims will not be material to our results
of operations.
During 2004, we incurred estimated losses associated with
multiple hurricanes in Florida. As a result of this damage, we
recorded a loss contingency of approximately $5.5 million
associated with both wholly owned and unconsolidated apartment
communities. This charge is offset by a $750,000 receivable for
anticipated insurance recoveries. These estimates represent
managements best estimate of the probable and reasonably
estimable costs and are based on the most current information
available from our insurance adjustors.
During December 2004, a lawsuit was filed against us that
alleges various violations of the Fair Housing Act and the
Americans with Disabilities Act at 112 properties currently or
formerly owned by the Company. The plaintiffs are seeking
injunctive relief, in the form of retrofitting apartments and
public accommodations to comply with the Fair Housing Act and
the Americans with Disabilities Act; unspecified monetary
damages for the diversion of the plaintiffs resources to
address fair housing violations, punitive damages and
attorneys fees. We are in the process of evaluating the
claims asserted in this litigation. Due to the preliminary
nature of the litigation, it is not possible to predict or
determine the outcome of the legal proceeding, nor is it
reasonably possible to estimate the amount of loss, if any, that
would be associated with an adverse decision.
We are a party to various other claims and routine litigation
arising in the ordinary course of business. We do not believe
that the results of any such claims or litigation, individually
or in the aggregate, will have a material adverse effect on our
business, financial position or results of operations.
|
|
(14) |
Supplemental Cash Flow Information |
Significant non-cash investing and financing activities for the
years ended December 31, 2004, 2003 and 2002 consisted of
the following:
|
|
|
|
|
Issued $10.8, $47.6 and $8.7 million of A-1 Common Units as
partial consideration for properties acquired during 2004, 2003
and 2002, respectively; |
|
|
|
Issued $4.5 million of A-2 Common Units as partial
consideration for real estate during 2004. |
|
|
|
Holders of Series K Preferred Units and Series L
Preferred Units converted $25.0 million each of their units
into Common Shares during 2004; |
|
|
|
Holders of Series H Preferred Units converted
$71.5 million of their units into Common Units during 2003; |
|
|
|
Redeemed $47.9 million, $25.5 million and
$41.7 million A-1 Common Units for Common Shares during
2004, 2003 and 2002, respectively; |
|
|
|
Holders of Series J Preferred Units converted
$25 million of their units into Common Shares during 2002; |
|
|
|
Recorded an accrual related to moisture infiltration and
resulting mold remediation for $36.1 million and
$11.3 million at one of our high-rise properties in
Southeast Florida during 2003 and 2002, respectively; |
94
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Assumed mortgage debt of $113.6 million, $55.4 million
and $195.6 million during 2004, 2003 and 2002,
respectively, in connection with the acquisition of apartment
communities; |
|
|
|
Holders of Series A Preferred Units converted
$71.9 million and $5.7 million of their units into
Common Shares during 2003 and 2002, respectively. |
|
|
(15) |
Related Party Transactions |
Related Party Transactions
Ameriton paid approximately $3.2 million and
$1.5 million to certain officers and employees of the
Operating Trust related to realized returns on investments sold
during 2004 and 2003, respectively, none of which were made to
members of Ameritons board. Four members of
Ameritons board (James H. Polk, III, John C. Schweitzer,
R. Scot Sellers and Charles E. Mueller, Jr.) are Trustees
of Archstone-Smith or executive officers of the Operating Trust.
During 1997, as part of the employee share purchase plan,
certain officers and other employees purchased Common Shares of
Archstone-Smith. Archstone-Smith financed 95% of the total
purchase price by issuing notes representing approximately
$17.1 million. As of December 31, 2004, the aggregate
outstanding balances on these notes were approximately $917,000.
ArchstoneSmith has the following business relationships with
business entities or family members of Board of Trustee member
Robert H. Smith:
Mr. Smith owns a residence within a condominium in Crystal
City, where Archstone-Smith staffs the property with doormen,
maintenance, and administrative staff. Archstone-Smith is
contractually reimbursed by the condominium association for
payroll and benefits costs, and receives a contractual monthly
management fee of $848 for other Archstone-Smith management
oversight. ASN does not have an ownership interest in this
property. Archstone-Smith billed $175,368 during 2004 for
expenses incurred and management fees for this property.
Mr. Smith and Mr. Kogod have a 0.33% and 4.36%
ownership interest, respectively, in a partnership which owns
two apartment communities in Washington D.C. Archstone-Smith
receives a contractual management fee of 4.5% of revenues to
employ the property maintenance and administrative staff, manage
the property, and perform all accounting functions.
Archstone-Smith does not have an ownership interest in this
property. We billed $941,301 during the twelve months ended
December 31, 2004, for expenses incurred and management
fees for this property.
Mr. Smiths daughter is employed as a Vice President
in Marketing at a salary and bonus of approximately $109,000 and
received option grants with a face value of $237,000 as
compensation during 2004. She has been employed by the Company
and its predecessor Charles E. Smith Residential Realty since
September 1980.
During February 2005, we redeemed our remaining 200,000
Series E Perpetual Preferred Units at liquidation value
plus accrued dividends.
During February 2005, we sold our investment in Viva Group, Inc.
(d/b/a Rent.com) to eBay Inc. for approximately
$27.5 million. This amount is net of $3.9 million paid
to exercise certain Viva Group, Inc warrants. Of this amount,
approximately $1.6 million was deposited in an escrow
account to secure eBays rights to certain indemnifications
associated with the transaction. This amount will be paid to us
in August 2006 less amounts, if any, available to eBay in
respect to indemnification claims.
95
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SUPPLEMENTARY INFORMATION
The Trustee and Unitholders
Archstone-Smith Operating Trust:
We have audited and reported separately herein on the
consolidated balance sheets of Archstone-Smith Operating Trust
and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of earnings, unitholders
equity, other common unitholders interest and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2004.
Our audits were made for the purpose of forming an opinion on
the consolidated financial statements of Archstone-Smith
Operating Trust and subsidiaries taken as a whole. The
supplementary information included in Schedules III
and IV is presented for purposes of additional analysis and
is not a required part of the consolidated financial statements.
Such information has been subjected to the auditing procedures
applied in the audits of the consolidated financial statements
and, in our opinion, is fairly stated in all material respects
in relation to the consolidated financial statements taken as a
whole.
Effective July 1, 2003, Archstone-Smith Operating Trust
adopted FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (revised). As a result, the
accompanying consolidated financial statements, referred to
above, have been restated to reflect the consolidated financial
position and results of operations of Archstone-Smith Operating
Trust and certain previously unconsolidated entities in
accordance with U.S. generally accepted accounting
principles.
Denver, Colorado
February 28, 2005
96
ARCHSTONE-SMITH OPERATING TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2004
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost to | |
|
|
|
|
|
|
|
|
Archstone-Smith Trust | |
|
Costs | |
|
|
|
|
|
|
| |
|
Capitalized | |
|
|
|
|
Encum- | |
|
|
|
Buildings & | |
|
Subsequent to | |
|
|
Units | |
|
brances | |
|
Land | |
|
Improvements | |
|
Acquisition | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Apartment Communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, Georgia
|
|
|
2,459 |
|
|
|
43,157 |
|
|
|
26,308 |
|
|
|
149,077 |
|
|
|
28,439 |
|
|
Austin, Texas
|
|
|
1,446 |
|
|
|
10,980 |
|
|
|
6,828 |
|
|
|
26,791 |
|
|
|
55,626 |
|
|
Boston, Massachusetts
|
|
|
1,338 |
|
|
|
163,035 |
|
|
|
68,664 |
|
|
|
49,330 |
|
|
|
129,726 |
|
|
Chicago, Illinois
|
|
|
1,313 |
|
|
|
41,022 |
|
|
|
85,603 |
|
|
|
50,545 |
|
|
|
8,827 |
|
|
Dallas, Texas
|
|
|
1,364 |
|
|
|
|
|
|
|
9,906 |
|
|
|
52,375 |
|
|
|
19,556 |
|
|
Denver, Colorado
|
|
|
2,299 |
|
|
|
8,500 |
|
|
|
22,646 |
|
|
|
78,313 |
|
|
|
103,328 |
|
|
Houston, Texas
|
|
|
1,783 |
|
|
|
33,233 |
|
|
|
16,393 |
|
|
|
32,786 |
|
|
|
68,643 |
|
|
Inland Empire, California
|
|
|
1,594 |
|
|
|
16,659 |
|
|
|
12,663 |
|
|
|
71,771 |
|
|
|
13,810 |
|
|
Long Island, New York
|
|
|
396 |
|
|
|
78,000 |
|
|
|
|
|
|
|
|
|
|
|
58,462 |
|
|
Los Angeles, California
|
|
|
5,476 |
|
|
|
100,532 |
|
|
|
243,986 |
|
|
|
348,589 |
|
|
|
404,613 |
|
|
Orange County, California
|
|
|
1,647 |
|
|
|
30,690 |
|
|
|
25,612 |
|
|
|
46,134 |
|
|
|
109,318 |
|
|
Orlando, Florida
|
|
|
312 |
|
|
|
|
|
|
|
3,110 |
|
|
|
17,620 |
|
|
|
976 |
|
|
Phoenix, Arizona
|
|
|
876 |
|
|
|
|
|
|
|
7,202 |
|
|
|
93 |
|
|
|
46,585 |
|
|
Portland, Oregon
|
|
|
228 |
|
|
|
|
|
|
|
851 |
|
|
|
|
|
|
|
12,906 |
|
|
Raleigh, North Carolina
|
|
|
1,324 |
|
|
|
13,588 |
|
|
|
13,499 |
|
|
|
76,490 |
|
|
|
7,771 |
|
|
San Diego, California
|
|
|
3,406 |
|
|
|
90,036 |
|
|
|
51,413 |
|
|
|
115,328 |
|
|
|
242,192 |
|
|
San Francisco, California
|
|
|
5,100 |
|
|
|
82,376 |
|
|
|
175,641 |
|
|
|
267,152 |
|
|
|
255,726 |
|
|
Seattle, Washington
|
|
|
3,208 |
|
|
|
60,528 |
|
|
|
49,491 |
|
|
|
132,368 |
|
|
|
105,549 |
|
|
Southeast, Florida
|
|
|
3,342 |
|
|
|
10,758 |
|
|
|
95,286 |
|
|
|
273,155 |
|
|
|
42,343 |
|
|
Stamford, Connecticut
|
|
|
160 |
|
|
|
|
|
|
|
5,775 |
|
|
|
1,225 |
|
|
|
29,487 |
|
|
Ventura County, California
|
|
|
716 |
|
|
|
|
|
|
|
12,095 |
|
|
|
31,024 |
|
|
|
37,323 |
|
|
Washington, D.C. Metropolitan Area
|
|
|
8,847 |
|
|
|
186,093 |
|
|
|
236,228 |
|
|
|
506,050 |
|
|
|
399,149 |
|
|
West Coast, Florida
|
|
|
746 |
|
|
|
|
|
|
|
5,430 |
|
|
|
30,766 |
|
|
|
8,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities Total
|
|
|
49,380 |
|
|
|
969,187 |
|
|
|
1,174,630 |
|
|
|
2,356,982 |
|
|
|
2,188,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, Massachusetts
|
|
|
1,113 |
|
|
|
60,692 |
|
|
|
41,345 |
|
|
|
121,881 |
|
|
|
72,647 |
|
|
Chicago, Illinois
|
|
|
3,025 |
|
|
|
130,142 |
|
|
|
118,828 |
|
|
|
373,044 |
|
|
|
24,884 |
|
|
Southeast Florida
|
|
|
240 |
|
|
|
17,775 |
|
|
|
|
|
|
|
26,515 |
|
|
|
1,474 |
|
|
NYC Metropolitan Area
|
|
|
1,062 |
|
|
|
197,302 |
|
|
|
84,522 |
|
|
|
181,256 |
|
|
|
194,404 |
|
|
Washington, D.C. Metropolitan Area
|
|
|
11,399 |
|
|
|
656,403 |
|
|
|
511,659 |
|
|
|
1,191,546 |
|
|
|
370,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Properties Total
|
|
|
16,839 |
|
|
|
1,062,314 |
|
|
|
756,354 |
|
|
|
1,894,242 |
|
|
|
663,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apartment Communities Operating and Under
Construction
|
|
|
66,219 |
|
|
|
2,031,501 |
|
|
|
1,930,984 |
|
|
|
4,251,224 |
|
|
|
2,852,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development communities In Planning and Owned
|
|
|
2,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel, retail and other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
|
69,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount at Which Carried at Year End | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Buildings & | |
|
|
|
Accumulated | |
|
Construction | |
|
|
|
|
Land | |
|
Improvements | |
|
Totals | |
|
Depreciation | |
|
Year | |
|
Year Acquired | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Apartment Communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, Georgia
|
|
|
35,674 |
|
|
|
168,150 |
|
|
|
203,824 |
|
|
|
(43,525 |
) |
|
|
1978-1999 |
|
|
|
1998-2001 |
|
|
Austin, Texas
|
|
|
15,312 |
|
|
|
73,933 |
|
|
|
89,245 |
|
|
|
(13,624 |
) |
|
|
1979-1996 |
|
|
|
1993 |
|
|
Boston, Massachusetts
|
|
|
36,349 |
|
|
|
211,371 |
|
|
|
247,720 |
|
|
|
(25,672 |
) |
|
|
1975-2002 |
|
|
|
1999-2002 |
|
|
Chicago, Illinois
|
|
|
26,723 |
|
|
|
118,252 |
|
|
|
144,975 |
|
|
|
(21,201 |
) |
|
|
1968-1988 |
|
|
|
1999-2001 |
|
|
Dallas, Texas
|
|
|
11,150 |
|
|
|
70,687 |
|
|
|
81,837 |
|
|
|
(13,212 |
) |
|
|
1983-2000 |
|
|
|
1993-2004 |
|
|
Denver, Colorado
|
|
|
25,024 |
|
|
|
179,263 |
|
|
|
204,287 |
|
|
|
(25,143 |
) |
|
|
1981-2002 |
|
|
|
1992-2004 |
|
|
Houston, Texas
|
|
|
11,205 |
|
|
|
106,617 |
|
|
|
117,822 |
|
|
|
(18,227 |
) |
|
|
1972-2003 |
|
|
|
1994-2004 |
|
|
Inland Empire, California
|
|
|
14,464 |
|
|
|
83,780 |
|
|
|
98,244 |
|
|
|
(19,900 |
) |
|
|
1980-1990 |
|
|
|
1995-2004 |
|
|
Long Island, New York
|
|
|
|
|
|
|
58,462 |
|
|
|
58,462 |
|
|
|
|
|
|
|
2003-2004 |
|
|
|
2001 |
|
|
Los Angeles, California
|
|
|
195,963 |
|
|
|
801,225 |
|
|
|
997,188 |
|
|
|
(28,427 |
) |
|
|
1973-2004 |
|
|
|
1998-2004 |
|
|
Orange County, California
|
|
|
26,379 |
|
|
|
154,685 |
|
|
|
181,064 |
|
|
|
(27,389 |
) |
|
|
1986-2002 |
|
|
|
1996-1999 |
|
|
Orlando, Florida
|
|
|
3,740 |
|
|
|
17,966 |
|
|
|
21,706 |
|
|
|
(4,614 |
) |
|
|
1988 |
|
|
|
1998 |
|
|
Phoenix, Arizona
|
|
|
8,476 |
|
|
|
45,404 |
|
|
|
53,880 |
|
|
|
(11,052 |
) |
|
|
1980-2001 |
|
|
|
1993-1997 |
|
|
Portland, Oregon
|
|
|
3,256 |
|
|
|
10,501 |
|
|
|
13,757 |
|
|
|
(3,093 |
) |
|
|
1985-1998 |
|
|
|
1995-1996 |
|
|
Raleigh, North Carolina
|
|
|
14,871 |
|
|
|
82,889 |
|
|
|
97,760 |
|
|
|
(22,590 |
) |
|
|
1985-1999 |
|
|
|
1998 |
|
|
San Diego, California
|
|
|
57,345 |
|
|
|
351,588 |
|
|
|
408,933 |
|
|
|
(40,798 |
) |
|
|
1985-2001 |
|
|
|
1996-1998 |
|
|
San Francisco, California
|
|
|
128,346 |
|
|
|
570,173 |
|
|
|
698,519 |
|
|
|
(91,028 |
) |
|
|
1965-2002 |
|
|
|
1995-2000 |
|
|
Seattle, Washington
|
|
|
58,307 |
|
|
|
229,101 |
|
|
|
287,408 |
|
|
|
(43,601 |
) |
|
|
1986-2002 |
|
|
|
1995-2004 |
|
|
Southeast, Florida
|
|
|
100,171 |
|
|
|
310,613 |
|
|
|
410,784 |
|
|
|
(14,797 |
) |
|
|
1986-2004 |
|
|
|
1998-2004 |
|
|
Stamford, Connecticut
|
|
|
6,312 |
|
|
|
30,175 |
|
|
|
36,487 |
|
|
|
(1,927 |
) |
|
|
2000-2002 |
|
|
|
2000 |
|
|
Ventura County, California
|
|
|
12,474 |
|
|
|
67,968 |
|
|
|
80,442 |
|
|
|
(5,816 |
) |
|
|
1985-2002 |
|
|
|
1997-2004 |
|
|
Washington, D.C. Metropolitan Area
|
|
|
205,543 |
|
|
|
935,884 |
|
|
|
1,141,427 |
|
|
|
(78,232 |
) |
|
|
1941-2002 |
|
|
|
1998-2002 |
|
|
West Coast, Florida
|
|
|
5,783 |
|
|
|
38,590 |
|
|
|
44,373 |
|
|
|
(9,787 |
) |
|
|
1982-1988 |
|
|
|
1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Communities Total
|
|
|
1,002,867 |
|
|
|
4,717,277 |
|
|
|
5,720,144 |
|
|
|
(563,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, Massachusetts
|
|
|
41,730 |
|
|
|
194,143 |
|
|
|
235,873 |
|
|
|
(12,610 |
) |
|
|
1986-1998 |
|
|
|
2001 |
|
|
Chicago, Illinois
|
|
|
80,003 |
|
|
|
436,753 |
|
|
|
516,756 |
|
|
|
(39,546 |
) |
|
|
1969-2002 |
|
|
|
2001 |
|
|
Southeast Florida
|
|
|
189 |
|
|
|
27,800 |
|
|
|
27,989 |
|
|
|
(2,574 |
) |
|
|
1964-2000 |
|
|
|
2001 |
|
|
NYC Metropolitan Area
|
|
|
149,452 |
|
|
|
310,730 |
|
|
|
460,182 |
|
|
|
(12,849 |
) |
|
|
2000-2002 |
|
|
|
2002-2004 |
|
|
Washington, D.C. Metropolitan Area
|
|
|
551,025 |
|
|
|
1,522,279 |
|
|
|
2,073,304 |
|
|
|
(125,927 |
) |
|
|
1923-2003 |
|
|
|
2001-2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Rise Properties Total
|
|
|
822,399 |
|
|
|
2,491,705 |
|
|
|
3,314,104 |
|
|
|
(193,506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apartment Communities Operating and Under
Construction
|
|
|
1,825,266 |
|
|
|
7,208,982 |
|
|
|
9,034,248 |
|
|
|
(757,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development communities In Planning and Owned
|
|
|
|
|
|
|
|
|
|
|
136,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel, retail and other assets
|
|
|
|
|
|
|
|
|
|
|
50,197 |
|
|
|
(6,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
|
|
|
|
|
|
|
|
|
9,221,038 |
|
|
|
(763,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
SCHEDULE III
The following is a reconciliation of the carrying amount and
related accumulated depreciation of the Operating Trusts
investment in real estate, at cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
Carrying Amounts |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Balance at January 1
|
|
$ |
8,999,180 |
|
|
$ |
9,297,735 |
|
|
$ |
8,612,213 |
|
|
|
|
|
|
|
|
|
|
|
Apartment communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartment properties acquired in the Smith Merger
|
|
|
|
|
|
|
|
|
|
|
31,877 |
|
|
Acquisition-related expenditures
|
|
|
1,080,639 |
|
|
|
573,768 |
|
|
|
539,652 |
|
|
Redevelopment expenditures
|
|
|
40,999 |
|
|
|
69,649 |
|
|
|
152,428 |
|
|
Recurring capital expenditures
|
|
|
50,147 |
|
|
|
48,960 |
|
|
|
40,683 |
|
|
Development expenditures, excluding land acquisitions
|
|
|
333,782 |
|
|
|
91,430 |
|
|
|
247,044 |
|
|
Acquisition and improvement of land for development
|
|
|
175,470 |
|
|
|
125,581 |
|
|
|
107,727 |
|
|
Dispositions
|
|
|
(1,460,046 |
) |
|
|
(1,209,956 |
) |
|
|
(439,847 |
) |
|
Provision for possible loss on investments
|
|
|
|
|
|
|
(3,714 |
) |
|
|
(2,611 |
) |
|
|
|
|
|
|
|
|
|
|
Net apartment community activity
|
|
$ |
220,991 |
|
|
$ |
(304,282 |
) |
|
$ |
676,953 |
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of retail asset acquired in the Smith Merger
|
|
|
|
|
|
|
|
|
|
|
(5,990 |
) |
|
Change in other real estate assets
|
|
|
867 |
|
|
|
5,727 |
|
|
|
14,559 |
|
|
|
|
|
|
|
|
|
|
|
Net other activity
|
|
|
867 |
|
|
|
5,727 |
|
|
|
8,569 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
9,221,038 |
|
|
$ |
8,999,180 |
|
|
$ |
9,297,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
Accumulated Depreciation |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Balance at January 1
|
|
$ |
648,982 |
|
|
$ |
578,855 |
|
|
$ |
412,894 |
|
Depreciation for the year(1)
|
|
|
203,639 |
|
|
|
200,356 |
|
|
|
206,625 |
|
Accumulated depreciation on real estate dispositions
|
|
|
(89,079 |
) |
|
|
(130,229 |
) |
|
|
(40,563 |
) |
Other
|
|
|
|
|
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
763,542 |
|
|
$ |
648,982 |
|
|
$ |
578,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Depreciation is net of $16.4 million and $3.0 million
for our intangible asset related to the value of leases in place
for real estate assets acquired in 2004 and 2003, respectively. |
98
SCHEDULE IV
Archstone-Smith Operating Trust
Mortgage Loans on Real Estate
12/31/04
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loan | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying | |
|
Subject to | |
|
|
|
|
|
|
Final | |
|
Periodic | |
|
|
|
Face | |
|
Amount | |
|
Delinquent | |
|
|
|
|
Maturity | |
|
Payment | |
|
|
|
Amount of | |
|
of | |
|
Principal or | |
Description |
|
Interest Rate | |
|
Date | |
|
Term | |
|
Prior Liens | |
|
Mortgages | |
|
Mortgages | |
|
Interest | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Mezzanine Construction Loan |
|
Condominium CA |
|
|
18% |
|
|
|
11/28/2006 |
|
|
|
(1) |
|
|
|
Senior Loan |
|
|
$ |
9,900 |
|
|
$ |
8,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 |
|
|
| |
|
|
Balance at January 1
|
|
|
|
|
|
|
|
|
|
New Mortgage Loans
|
|
$ |
8,650 |
|
|
$ |
|
|
|
Other(2)
|
|
|
79 |
|
|
|
|
|
|
Collections of Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
8,729 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Outstanding principal plus accrued and unpaid interest is due on
the maturity date. Partial prepayment is required to the extent
the borrower receives proceeds from the sale of constructed
units in accordance with contracted terms. |
|
(2) |
A portion of the accrued interest amount is added to the
principal amount on a monthly basis. |
99
ARCHSTONE-SMITH OPERATING TRUST
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
Archstone-Smith Operating
Trust
|
|
|
|
|
|
R. Scot Sellers
|
|
Chairman of the Board and |
|
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated:
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ R. Scot Sellers
R.
Scot Sellers |
|
Chief Executive Officer (principal executive officer) |
|
February 28, 2005 |
|
/s/ Charles E. Mueller,
Jr.
Charles
E. Mueller, Jr. |
|
Executive Vice President and Chief Financial Officer (principal
financial officer) |
|
February 28, 2005 |
|
/s/ Mark A. Schumacher
Mark
A. Schumacher |
|
Senior Vice President and Chief Accounting Officer (principal
accounting officer) |
|
February 28, 2005 |
|
Archstone-Smith Operating
Trust
|
|
|
|
|
By:
|
|
/s/ R. Scot Sellers
Chief
Executive Officer |
|
Trustee |
|
February 28, 2005 |
100
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain
other of the following documents have been previously filed with
the Securities and Exchange Commission and, pursuant to
Rule 12b-32, are incorporated herein by reference:
|
|
|
|
|
Number | |
|
Description |
| |
|
|
|
3 |
.1 |
|
Amended and Restated Declaration of Trust of Archstone-Smith
Operating Trust (incorporated by reference to Exhibit 4.3
to the Archstone-Smith Trusts Current Report on
Form 8-K filed with the SEC on November 1, 2001) |
|
3 |
.2 |
|
Amended and Restated Bylaws of Archstone-Smith Operating Trust
(incorporated by reference to Exhibit 4.4 to the
Archstone-Smith Trusts Current Report on Form 8-K
filed with the SEC on November 1, 2001) |
|
3 |
.3 |
|
Articles Supplementary for Series E Cumulative Redeemable
Preferred Units of Beneficial Interest of Archstone-Smith
Operating Trust (incorporated by reference to Exhibit 10.1
of Archstone-Smiths Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2002) |
|
3 |
.4 |
|
Articles Supplementary for Series F Cumulative Redeemable
Preferred Units of Beneficial Interest of Archstone-Smith
Operating Trust (incorporated by reference to Exhibit 10.2
of Archstone-Smiths Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2002) |
|
3 |
.5 |
|
Articles Supplementary for Series G Cumulative Redeemable
Preferred Units of Beneficial Interest of Archstone-Smith
Operating Trust (incorporated by reference to Exhibit 10.3
of Archstone-Smiths Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2002) |
|
3 |
.6 |
|
Articles Supplementary for Series M Preferred Unit of
Beneficial Interest of Archstone-Smith Operating Trust
(incorporated by reference to Exhibit 3.1 to the
Archstone-Smith Trusts Current Report on Form 8-K
filed with the SEC on December 16, 2004) |
|
4 |
.1 |
|
Indenture, dated as of February 1, 1994, between
Archstone-Smith Operating Trust (formerly Archstone Communities
Trust) and Morgan Guaranty Trust Company of New York, as Trustee
relating to Archstone-Smith Operating Trusts (formerly
Archstone Communities Trust) unsecured senior debt securities
(incorporated by reference to Exhibit 4.2 to
Archstone-Smith Operating Trusts (formerly Archstone
Communities Trust) Annual Report on Form 10-K for the year
ended December 31, 1993) |
|
4 |
.2 |
|
First Supplemental Indenture, dated February 2, 1994, among
Archstone-Smith Operating Trust (formerly Archstone Communities
Trust), Morgan Guaranty Trust Company of New York and State
Street Bank and Trust Company, as successor Trustee
(incorporated by reference to Exhibit 4.3 to
Archstone-Smith Operating Trusts (formerly Archstone
Communities Trust) Current Report on Form 8-K dated
July 19, 1994) |
|
4 |
.3 |
|
Indenture, dated as of August 14, 1997, between Security
Capital Atlantic Incorporated and State Street Bank and Trust
Company, as Trustee (incorporated by reference to
Exhibit 4.8 to Security Capital Atlantic
Incorporateds Registration Statement on Form S-11
(File No. 333-30747)) |
|
4 |
.5 |
|
Form of Archstone-Smith Trust common share ownership certificate
(incorporated by reference to Exhibit 3.3 to
Archstone-Smith Trusts Registration Statement on
Form S-4 (File No. 333-63734)) |
|
4 |
.10 |
|
Form of Archstone-Smith Trust share certificate for
Series I Preferred Units (incorporated by reference to
Exhibit 3.8 to Archstone-Smith Trusts Registration
Statement on Form S-4 (File No. 333-63734)) |
|
10 |
.1 |
|
Amended and Restated Declaration of Trust of Archstone-Smith
Trust (incorporated by reference to Exhibit 4.1 to the
Archstone-Smith Trusts Current Report of Form 8-K
filed with the SEC on November 1, 2001) |
|
10 |
.2 |
|
Amended and Restated Bylaws of Archstone-Smith Trust
(incorporated by reference to Exhibit 4.2 to the
Archstone-Smith Trusts Current Report on Form 8-K
filed with the SEC on November 1, 2001) |
|
10 |
.8 |
|
Archstone-Smith Trust 2001 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.14 to
Archstone-Smith Trusts Registration Statement on
Form S-4 (File No. 333-63734)) |
|
10 |
.9 |
|
Archstone-Smith Deferred Compensation Plan (incorporated by
reference to Exhibit 10.5 to Archstone-Smiths Annual
Report on Form 10-K for the year ended December 31,
2001) |
101
INDEX TO EXHIBITS (Continued)
|
|
|
|
|
Number | |
|
Description |
| |
|
|
|
10 |
.10 |
|
Amendment to Archstone-Smith Trust 2001 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of
Archstone-Smith Trusts Annual Report on Form 10-Q for
the Quarter Ended June 30, 2004) |
|
10 |
.11 |
|
Form of Non-Qualified Share Option Agreement for Archstone-Smith
Trust 2001 Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.1 of Archstone-Smith Trusts Annual
Report on Form 10-Q for the Quarter Ended
September 30, 2004) |
|
10 |
.12 |
|
Form of Restricted Share Unit Agreement for Archstone-Smith
Trust 2001 Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.1 of Archstone-Smith Trusts Annual Report on
Form 10-Q for the Quarter Ended September 30, 2004) |
|
10 |
.13 |
|
Form of Restricted Share Unit Agreement for Archstone-Smith
Trust Equity Plan for Outside Trustees (incorporated by
reference to Exhibit 10.1 of Archstone-Smith Trusts
Annual Report on Form 10-Q for the Quarter Ended
September 30, 2004) |
|
10 |
.14 |
|
Form of Indemnification Agreement entered into between
Archstone-Smith Trust and each of its officers and Trustees
(incorporated by reference to Exhibit 10.6 to
Archstone-Smith Trusts Annual Report on From 10K for the
year ended December 31, 2003) |
|
10 |
.15 |
|
Form of Change in Control Agreement between Archstone-Smith
Trust and certain of its officers (incorporated by reference to
Exhibit 10.7 to Archstone-Smiths Annual Report on
Form 10-K for the year ended December 31, 2002) |
|
10 |
.16 |
|
Amended and Restated Credit Agreement, dated as of
December 13, 2004, by and among Archstone-Smith Operating
Trust, as borrower, and Archstone-Smith Trust as parent, and
J.P. Morgan Chase Bank, as administrative agent, and Bank of
America, N.A., and Wells Fargo Bank, N.A., as syndication
agents, and Suntrust Bank and Commerzbank A.G., New York and
Grand Cayman Branches, as documentation agents |
|
10 |
.17 |
|
Archstone Dividend Reinvestment and Share Purchase Plan
(incorporated by reference to the prospectus contained in
Archstone-Smith Trusts Registration Statement on
Form S-3 (No. 333-44639-01)) |
|
10 |
.18 |
|
Shareholders Agreement, dated as of October 31, 2001,
by and among Archstone-Smith Trust, Archstone-Smith Operating
Trust, Robert H. Smith and Robert P. Kogod (incorporated by
reference to Exhibit 10.1 to Archstone-Smith Trusts
Current Report on Form 8-K filed with the SEC on
November 1, 2001) |
|
10 |
.19 |
|
Noncompetition Agreement by and among Charles E. Smith
Residential Realty, Inc., Charles E. Smith Residential Realty
L.P. and Robert P. Kogod and Robert H. Smith (incorporated by
reference to Exhibit 10.1 of Charles E. Smith Residential
Realty, Inc.s Annual Report on Form 10-K for the year
ended December 31, 1994) |
|
10 |
.20 |
|
Registration Rights and Lock-up Agreement (incorporated by
reference to Exhibit 10.2 of Charles E. Smith Residential
Realty, Inc.s Annual Report on Form 10-K for the year
ended December 31, 1994) |
|
10 |
.21 |
|
License Agreement between Charles E. Smith Management, Inc. and
Charles E. Smith Residential Realty, Inc. (incorporated by
reference to Exhibit 10.35 of Charles E. Smith Residential
Realty, Inc.s Annual Report on Form 10-K for the year
ended December 31, 1994) |
|
10 |
.22 |
|
License Agreement between Charles E. Smith Management, Inc. and
Charles E. Smith Residential Realty L.P. (incorporated by
reference to Exhibit 10.36 of Charles E. Smith Residential
Realty, Inc.s Annual Report on Form 10-K for the year
ended December 31, 1994) |
|
12 |
.1 |
|
Computation of Ratio of Earnings to Fixed Charges |
|
12 |
.2 |
|
Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends |
|
15 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
21 |
|
|
Subsidiaries of Archstone-Smith Operating Trust |
|
31 |
.1 |
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31 |
.2 |
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32 |
.1 |
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
102
INDEX TO EXHIBITS (Continued)
|
|
|
|
|
Number | |
|
Description |
| |
|
|
|
32 |
.2 |
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
99 |
.1 |
|
Corporate Governance Guidelines (incorporated by reference to
Exhibit 99.1 of Archstone-Smiths Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 2003) |
|
99 |
.3 |
|
Audit Committee Charter (incorporated by reference to
Exhibit 99.3 of Archstone-Smiths Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 2003) |
|
99 |
.4 |
|
Management Development and Executive Compensation Committee
Charter (incorporated by reference to Exhibit 99.4 of
Archstone-Smiths Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2003) |
|
99 |
.5 |
|
Nominating and Corporate Governance Committee Charter
(incorporated by reference to Exhibit 99.5 of
Archstone-Smiths Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 2003) |
103